MASTER 

NEGATIVE 
NO.  95-82404 


COPYRIGHT  STATEMENT 


The  copyright  law  of  the  United  States  (Title  17,  United  States  Code) 
governs  the  making  of  photocopies  or  other  reproductions  of  copyrighted 
materials  Including  foreign  works  under  certain  conditions.  In  addition, 
the  United  States  extends  protection  to  foreign  works  by  means  of 
various  International  conventions,  bilateral  agreements,  and 
proclamations. 

Under  certain  conditions  specified  in  the  law,  libraries  and  archives  are 
authorized  to  furnish  a  photocopy  or  other  reproduction.  One  of  these 
specified  conditions  is  that  the  photocopy  or  reproduction  Is  not  to  be 
"used  for  any  purpose  other  than  private  study,  scholarship,  or  research." 
If  a  user  makes  a  request  for,  or  later  uses,  a  photocopy  or  reproduction 
for  purposes  in  excess  of  "fair  use,"  that  user  may  be  liable  for  copyright 
Infringement. 

The  Columbia  University  Libraries  reserve  the  right  to  refuse  to  accept  a 
copying  order  If,  In  its  judgement,  fulfillment  of  the  order  would  Involve 
violation  of  the  copyright  law. 


Author: 


Title: 


Credits  and  collections 


Place: 


Chicago 


Date: 


[1918] 


qt;-&iqo^-i 


MASTER   NEGATIVE   # 


COLUMBIA  UNIVERSITY  LIBRARIES 
PRESERVATION  DIVISION 

BIBLIOGRAPHIC  MICROFORM  TARGET 


ORIGINAL  MATERIAL  AS  FILMED  -    EXISTING  BIBLIOGRAPHIC  RECORD 


^itnhim*f. 


257 

086 


Credits  and  collections ;  tested  metliods  and  records  for 
handling  credits — finding  the  right  credit  basis — forti- 
fying your  credit  policy — collection  plans  that  cut  costs. 
Chicago,  New  York  [etc.]  A.  W.  Shaw  company  [^'IQIS] 

xviii  p.,  1  1.,  267,  xxi-xxiii  p.  incl.  fror.t.,  illus.  (forms)  fold,  tab.,  fold, 
chart,  fold,  forms.    21*"'.    {Half-title:  The  Shaw  banking  scries) 


1.  Credit.    2.  Collecting  of  accounts. 


Library  of  Congress 
Copyright    A  508706 


6 


HFSS66.C8S 


1!M45 


RESTRICTIONS  ON  USE: 


TECHNICAL  MICROFORM  DATA 


FILM  SIZE:       ^S*^*^ 


REDUCTION  RATIO: 


\1^ 


IMAGE  PLACEMENT:   lA 


® 


IB     IIB 


DATE  FILMED: 


S|l|qg 


INITIALS: 


Wvy 


TRACKING  #  : 


»)<>>  tS200 


FILMED  BY  PRESERVATION  RESOURCES.  BETHLEHEM,  PA. 


.•v^ 


A^ 


^^ 


<^^  ^.V 
%f^ 


•v? 


> 

00 

o 
o 

m 


o 


o 
o 

C/) 


X 

-< 

M 


IX'.^ 


CJl 

3 
3 


> 

CD 

o  m 

(DO 

"vi  o  o 

CO 


N 


X 

M 


>^ 


.'v'' 


.'V*.' 


^^ 


a^ 


* 


■?: 


S 

3 

9 


> 


o 

3 
i 


o 
o 

3 
3 


O 


o 


00 


to 
b 


ro 

Oi 


1.0  mm 


1.5  mm 


2.0  mm 


ABCOEFGMUKLMNOPORSTUVWXY/ 
abcdvt^ilklmnocgrstuvwuy/ 1  ?34<i67890 


ABCDEFGHIJKLMNOPQRSTUVWXYZ 
abcdefghijklmnopqrstuvwxyzl234567890 


ABCDEFGHIJKLMNOPQRSTUVWXYZ 

abcdefghijklmnopqrstuvwxyz 

1234567890 


2.5  mm 


ABCDEFGHIJKLMNOPQRSTUVWXYZ 

abcdefghijklmnopqrstuvwxyz 

1234567890 


■^i?. 


C^ 


4^ 


4^ 


V 


** 

«* 


.^* 


^ 


m 

H 

O 
O 

•o  m  "o 
OL,"0 

>  C  CO 
I  T)  ^ 

0</)   5 

m 

33 
O 

m 


*  ** 


f^ 


^'^^>^ 
%f^ 


C 


4^ 


i^ 


^^ 


* 


I—* 

N3 

tn 

O 

5 

3 
3 

CT 

• 

ABCDE 
cdefghi 

f^ 

Zm 

?5 

^O 

3  I 

3i 

3  r- 

IJKLM 
nopqr 

si 

2  ^ 

^2 

t0  ^ 

<9 

^c 

•^  (/) 

«i< 

^-« 

$;$ 

r^c 

CJ^X 

^-< 

00  (M 
8 

(J»< 

o%x 

^-< 

00 IM 

s 


4^A 


^jj^4f 


Columbia  ?Kntberstitp 

intijeCitpofjeetDgorfe 

LIBRARY 


School  of  Business 


THE  SHAW  BANKING  SERIES 


CREDITS  AND 
COLLECTIONS 


THE  SERIES:  advertising  and  service;  account- 
ing AND  COSTS;  LOANS  AND  DISCOUNTS;  EXECUTIVB 
CONTROL;  BUILDINGS.  EQUIPMENT.  AND  SUPPLIES t 
CREDITS  AND  COLLECTIONS. 


CREDITS  AND 
COLLECTIONS 


TESTED  METHODS  A>ID  RECORDS  FOR  HANDLING  CREDITS 
—FINDING  THE  RIGHT  CREDIT  BASIS— FORTIFY- 
ING YODR  CREDIT  POLICY- COLLECTION 
PLANS  THAT  CUT  COSTS 


The    "credit  dictionary'*  shown  here  enables  the  vice-president  of  a 

Michigan  bank  to  tell  in  a  moment,  without  looking  in  files  or  folders, 

the  exact  condition  of  any  borrower.    In  addition  to  this  the  book 

also  contains  a  complete  financial  record  of  ecch  depositor. 


A.  W.  SHAW  COMPANY 

CHICAGO  NEW  YORK 

LONDON 


INTENTIONAL  SECOND  EXPOSURE 


CREDITS  AND 
COLLECTIONS 


TESTED  METHODS  AND  RECORDS  FOR  HANDLING  CREDITS 
—FINDING  THE  RIGHT  CREDIT  BASIS— FORTIFY- 
ING YOUR  CREDIT  POLICY- COLLECTION 
PLANS  THAT  CUT  COSTS 


The    "credit  dictionary"  shown  here  enables  the  vice-president  of  a 

Michigan  bank  to  tell  in  a  moment,  without  looking  in  files  or  folders, 

the  exact  condition  of  any  borrower.     In  addition  to  this  the  book 

also  contains  a  complete  financial  record  of  e&ch  depositor. 


A.  W.  SHAW  COMPANY 

CHICAGO  NEW  YORK 

LONDON 


11 


COPYRIGHT,  1918,  BY 

A.  W.  SHAW  COMPANY 

nuMTB>  ni  u*  a.  A. 


VJlX\} 


^  i--' 


\ 


si  - 


CONTENTS 


I— TESTED  METHODS  FOR  HANDLING  CREDITS 

CHAPTER  I 

Perfecting  Your  Credit  Records  AND  Routine   .     .      1 

Why  one  bank  doesn't  have  to  "beat  about  the  bush" 
with  applicants.  How  granting  credit  may  influence 
profits.  The  human  element  behind  the  figures.  The 
right  sort  of  credit  man.  Making  prospective  customers 
"feel  at  home."  What  the  president  of  an  Iowa  bank 
calls  "real  banking."  A  liability  ledger  that  brings  many 
dollars  of  profit.  A  card  file  that  helps  a  Missouri  bank 
make  loans  intelligently.  Gretting  the  credit  data  to  the 
discount  committee.  A  folder  that  simplifies  the  granting 
of  credits.  How  one  bank  handles  maturing  notes.  How 
analyses  of  risks  saved  various  banks  from  serious  losses. 
"  First  aid  "  to  the  credit  department.  How  an  Ohio  bank 
gets  financial  statements  of  customers  promptly.  A  letter 
that  keeps  one  bank's  credit  files  up  to  date.  A  "new 
business"  card  used  profitably  by  an  Illinois  banker,  as  a 
credit  help. 


CHAPTER  II 

Simplifying  THE  Credit  Officer's  Duties  .... 

Why  the  credit  manager's  records  must  be  at  his  finger 
tips.  How  one  error  may  affect  profits.  The  problem  of 
the  large  bank.  How  one  bank  shortens  its  credit  routine. 
A  card  record  with  some  unusual  features.  What  col- 
lateral will  tell  you  about  a  borrower.  Legalizing  deposits. 
How  one  bank  handles  loans  over  $1,000.  How  one  dis- 
count committee  is  organized  to  cooperate  with  the  credit 
manager.  Why  it  pays  to  keep  records  up  to  the  minute. 
An  "in"  and  "out"  balance  sheet  that  simplifies  the  loan 

•  • 


23 


CONTENTS 

records.  What  a  western  bank  does  to  lessen  the  credit 
routine.  How  the  clerks  and  bookkeepers  can  assist  the 
credit  manager.  A  loan  "tickler"  card  file  used  with 
profit  by  a  Toledo  bank.  How  the  credit  manager  may 
influence  the  life  of  the  bank. 


CHAPTER  III 

Working  WITH  THE  Discount  Committee    .... 

A  bank  where  every  officer  has  full  power  to  make  loans. 
Letting  low-priced  help  handle  the  details.  How  taking 
things  for  granted  lost  a  Michigan  bank  $10,000.  Getting 
borrowers  to  see  the  "whys"  and  "wherefores."  Why  it 
pays  to  be  absolutely  frank  with  applicants.  What  in- 
formation the  offerings  should  include.  How  the  classifica- 
tion of  loans  forestalls  oie  great  danger.  "Self -loans" 
that  caused  214  out  of  418  failures.  "Coding"  reports. 
A  form  which  minimizes  one  committee's  work.  "A 
committee  of  the  whole"  supplies  helpful  information. 


33 


CHAPTER  IV 

How  TO  Classify  THE  Risks 40 

A  classified  history  of  borrowers.  Danger  signals  that 
minimize  delays  in  credit  work  during  banking  hours.  An 
effective  card  clavssification.  A  file  of  incalculable  value. 
How  a  classification  of  loans  helps  the  banker  to  "  keep  his 
ear  to  the  ground."  How  one  bank  cooperates  with  its 
customers.  The  growth  of  business  that  results.  One 
way  to  file  information  on  real  estate  loans.  Keeping  tab 
on  insurance  policies.  How  to  handle  letters  of  credit. 
Lessening  the  danger  of  forgery.  A  circular  that  helps 
the  holder  to  check  up  his  payments. 


CHAPTER  V 
Gathering  Credit  Information  .     . 


65 


One  strong  force  in  regulating  bank  credits.  How  clipping 
bureaus  can  help.  How  an  alert  credit  department  saved 
one  bank  a  considerable  loss.  An  error  that  one  investi- 
gator uncovered.    Finding  out  the  actual  condition  of  the 


vui 


CONTENTS 

borrower.  What  is  the  best  procedure  when  a  borrower 
is  spending  too  much  money  on  a  side  line.  How  agency 
reports  help  in  buying  commercial  paper.  What  form 
letters  can  do.  How  a  difficult  situation  was  handled 
tactfully.    A  dangerous  method  of  getting  information. 

II— FINDING  THE  RIGHT  CREDIT  BASIS 

CHAPTER  VI 

How  TO  Analyze  Statements 77 

How  one  merchant  lines  up  his  assets  and  liabilities  to  his 
banker's  satisfaction.  Statements  that  reveal  essential 
qualities.  Quick  assets  versus  slow  assets.  What  a  state- 
ment should  show.  Some  points  that  need  watching. 
How  one  banker  unearthed  a  $50,000  error.  How  an 
eastern  banker  secures  absolutely  reliable  credit  data. 
Specific  information  that  strengthens  a  bank's  security. 
The  "acid  test"  of  the  credit  manager.  Locating  dis- 
crepancies in  financial  statements.  The  three  C's  of 
credit.  Seven  questions  the  credit  manager  should  ask 
himself.  The  2  for  1  rule.  What  to  do  when  the  appli- 
cant's liabilities  are  more  than  50%  of  the  assets.  When 
notes  receivable  are  not  quick.  Watching  the  inventory. 
How  stocks,  bonds,  and  mvestments  are  considered. 
Other  ways  to  judge  a  customer's  business  ability  from  his 
statement.    Some  simple  types  of  statements. 


CHAPTER  VII 
Dbtermininq  the  Personal  Risk 


100 


How  personal  integrity  justified  a  loan  of  $33,000.  Some 
mteresting  figures.  The  "moral  risk.'*  Something  more 
important  even  than  the  applicant's  success.  The  value 
of  letters  of  introduction.  What  one  "new  busmess 
department  accomplishes  to  help  the  credit  department. 
Determining  the  personal  hazard.  How  an  Ohio  bank  gets 
a  line  on  prospective  customers.  How  a  frank  talk 
brought  fruitful  results.  An  apparently  sound  statement 
that  didn't  justify  a  loan.  The  two  quaUties  a  banker 
needs  in  dealing  with  borrowers. 


IX 


I 


I 


CONTENTS 

CHAPTER  VIII 

Appraising  THE  Borrower's  Financial  Condition     .  113 

Going  beyond  the  figures.  What  the  income  account 
shows.  A  comparison  of  two  annual  statements.  How  the 
cautious  banker  analyzes  statements.  What  to  include 
under  inventory.  The  question  of  contingent  liabilities. 
What  to  look  for  under  "notes  payable."  Why  the 
banker  is  justified  in  asking  many  questions.  How  com- 
paring statements  will  lessen  risks.  The  value  of  a  profit 
and  loss  statement.  A  ratio  of  quick  assets  to  liabilities 
that  justifies  loans.    How  deep  the  credit  man  must  go. 

CHAPTER  IX 

Weighing  the  Personal  Equation  in  Farmer  Credit  125 

One  bank's  record  of  loans  to  farmers  shows  repayments 
of  practically  100%.  Developing  gilt-edged  risks.  Op- 
portunities for  serving  the  farmer.  The  new  attitude 
toward  farmer's  loans.  How  the  joint  stock  land  bank 
has  helped.  The  farmer  as  a  commercial  risk.  What  a 
Michigan  banker  has  to  say  about  farm  loans.  Getting 
financial  histories  of  farmers.  An  Illinois  bank's  card 
record.  A  weakness  in  the  farm  credit  situation.  How 
an  eastern  banker  handles  short-term  loans.  What  friend- 
liness will  accomplish.  How  the  Farmers  and  Merchants 
State  Bank  of  Decatur  gets  new  customers.  The  question 
of  the  interest  rate.  How  about  the  man  who  rents  his 
farm?   How  one  bank  was  saved  from  expensive  litigation. 

CHAPTER  X 

How  Much  to  Lend  TO  Farmers 135 

How  country  banks  can  serve  the  community.  Talking 
to  farmers  on  their  own  ground.  Where  a  renter  is  a 
better  risk  than  an  owner.  The  borrower's  character  as  a 
basis  for  credit.  How  a  western  banker  handled  a  cattle 
loan  successfully.  Gaining  the  confidence  of  the  farmers. 
How  one  banker  refinanced  several  farms.  Making  the 
service  sincere.  A  financial  program  to  urge  upon  the 
farmer.  Fourteen  suggestions  for  success  in  forming 
which  bankers  should  promulgate. 


CONTENTS 
in— FORTIFYING  YOUR  CREDIT  POLICY 


CHAPTER  XI 


Audits  that  Guard  Against  Loss 


143 


An  outside  audit  that  improved  one  concern's  credit. 
How  to  proceed  when  a  customer's  business  is  hampered 
by  "dry  rot."  When  to  make  thorough  audits  most  ad- 
vantageously. Putting  your  finger  on  the  weak  spots. 
What  periodical  audits  can  accomplish.  How  an  audit 
brought  about  the  collection  of  $12,000.  How  one  con- 
cern got  into  the  favored  borrower  class.  An  audit  that 
uncovered  an  error  of  $24,000.  Eliminating  guesswork. 
Handling  depreciation.  How  to  deal  with  the  overcon- 
fident customer.  How  an  audit  aids  in  detecting  the 
manipulation  of  mechanical  accounts.  Bringing  out  the 
leading  facts.  An  analysis  of  notes  receivable.  Points  to 
watch  about  accounts  receivable.  Handling  the  item  of 
real  estate  and  buildings.  When  the  banker  should  sound 
a  note  of  warning.  A  test  for  liquidation.  Determining  the 
peak  of  a  company's  borrowing.  How  to  classify  reserves. 
Insuring  the  lives  of  executives.  One  bank's  industrial 
service  department  as  a  credit  help. 


CHAPTER  XII 
Keeping  in  Touch  with  Market  Conditions   . 


.  163 


Appraising  business  sentiment  by  ** ballot"  slips.  What 
causes  panics.  A  bird's-eye  view  of  business  conditions. 
Keeping  a  line  on  trade.  Credit  files  that  help.  Com- 
mercial paper  as  a  barometer  for  general  financial  con- 
ditions. What  the  credit  manager  needs  to  know  about 
market  values.    How  credit  managers  can  cooperate. 


CHAPTER  XIII 
Exchanging  Credit  Information     . 


.  171 


The  various  sources  of  information.  How  banks  can 
cooperate  to  solve  their  lending  problems.  How  to  handle 
interchange  of  information  at  minimum  cost.    What  a 


CONTENTS 


CONTENTS 


ill 


Minneapolis  banker  thinks  about  form  letters.  How  an 
Indiana  banker  meets  the  "inquiry  nuisance."  An  ef- 
fective form  for  answering  inquiries.  How  one  bank 
handles  "spongers."  Eighty-four  inquiries  in  a  single 
day!  What  an  analysis  of  the  inquiries  showed.  Ten 
rules  that  219  banks  adopted  to  simplify  the  inquiry 
problem.  When  requests  are  incorrect  in  form.  A  model 
inquiry  letter. 


CHAPTER  XIV 
Filing  Methods  THAT  Speed  Up  THE  Work       .     .     .  184 

Perfecting  the  filing  routine.  The  methods  that  held  one 
bank's  losses  of  credit  folders  down  to  one  during  eight 
years.  How  these  folders  are  marked.  An  unusual  card 
record.  Two  slips  that  keep  track  of  folders  out  to  oflBcers. 
How  one  bank  saves  unnecessary  copying.  Keeping  track 
of  "black  and  white"  facts.  Making  a  permanent  record 
of  "office-in-the-hat"  information.  A  simple  filing 
method  that  produces  facts  quickly.  How  to  record  pur- 
chases of  commercial  paper.  Files  that  don't  have  to  be 
kept  in  the  vault.  Where  files  are  placed  to  make  them 
most  "get-at-able." 


IV—COLLECTION  PLANS  THAT  CUT  COSTS 

CHAPTER  XV 

How  A  Clearing  House  for  Country  Items 

Can  Help 201 


A  "country  clearing  house"  and  what  it  accomplished. 
How  the  clearing  house  simplifies  the  routine  of  handling 
items.  What  happens  to  the  foreign  slips.  Grouping 
the  checks.  How  the  totals  are  listed.  A  form  for 
handling  collection  charges.  How  consolidation  saves  a 
large  sum  for  the  member  banks.  Cutting  exchange 
charges  more  than  50%.  How  the  cost  of  operation  is 
determined.  Saving  $12  a  day  on  postage  alone.  How  the 
time  for  getting  returns  is  reduced.  How  the  items  are 
recorded.  How  the  exchange  room  is  equipped.  Settling 
the  balances.    A  simple  plan  that  reduces  errors. 

si 


CHAPTER  XVI 

Handling  Collections  AT  A  Profit 215 

How  a  middle-western  bank  has  stopped  collection  leaks. 
Cutting  losses  48%  in  60  days.  Why  a  definite  plan  is 
essential.  Three  forms  that  speed  up  collections.  A 
notice  that  is  as  effective  as  a  personal  call.  How  not  to 
antagonize  the  customer.  A  remittance  form  that 
acts  as  a  tickler.  What  happens  when  the  item  is  paid. 
An  effective  magnet.  How  one  bank  facilitates  the 
handling  of  drafts  and  acceptances.  A  card  record  for 
out-of-town  banks  that  reduces  errors.  How  telegrams 
can  get  quick  action.  A  combined  advice  and  collection 
register.  A  form  that  accomplished  five  distinct  results. 
How  an  Ohio  bank  collects  from  30%  to  40%  of  all  items  on 
time.  Forms  that  save  clerical  expense.  Another  form 
that  reduces  friction.     Paving  the  way  to  greater  profits. 


CHAPTER  XVII 

Speeding  Up  THE  Messenger  Service 238 

Routing  trips  economically.  How  a  southern  bank  handles 
its  messengers.  Collecting  by  telephone.  The  advantage 
of  having  regular  routes.  How  the  trained  messenger  can 
guard  the  bank's  interests.  Saving  $100  on  postage 
charges.  How  a  northwestern  bank  manages  the  inside 
routine.  Forms  to  facilitate  recording  the  collections. 
How  the  country  collection  department  operates.  How  a 
country  bank  profitably  reorganized  its  collection  routine. 
Backing  up  the  messengers.  A  collection  letter  that  raised 
the  standard  of  collection  service.  Different  colored 
forms  for  different  departments.  A  "messenger  sheet" 
that  affords  a  record  of  every  item. 


CHAPTER  XVIII 
Handung  Trade  Acceptances    .     . 


259 


The  trade  acceptance  as  a  credit  risk.  The  importance  of 
examining  the  credit  of  acceptors.  Putting  the  acceptor's 
best  foot  forward.  One  way  to  insure  the  acceptor's 
iponsibility.    How  the  plan  works  out.    The  advantage 


zui 


CONTENTS 


of  joining  the  Federal  Reserve  System.  A  wholesaler  who 
discounted  $1,150,000  of  trade  acceptances  in  a  year  at  a 
cost  of  only  $140.  How  to  record  and  collect  trade 
acceptances.  Entering  them  in  the  liability  ledger.  How 
to  take  care  of  payments.  Giving  each  account  a  number. 
A  form  that  facilitates  collections. 


Index 


Or 


WHY  TmS  BOOK  WILL  BE  OF  REAL 

VALUE  TO  YOU 

'po  safeguard  the  credit  and  coUection  department  against 
loss  and  at  the  same  time  do  a  maximum  volume  of 
business,  may  nghtly  be  regarded  as  the  goal  of  eve^ 
«?r^'.«  •  *""^' however,  this  ideal  condition  seems  diffi- 
mlt  of  attamment,  the  course  of  procedure  being  more  or 
less  uncharted,  so  to  speak. 

This  book,  which  is  one  volume  of  the  Shaw  Banking 
Series,  aims  to  assist  the  banker  in  mapping  out  his  course 
by  outhmng  m  systematic  form  the  test^  plans,  meS 
orgamzation  and  the  like,  which  have  enabl^  other  bankers 
not  only  to  establish   their  institutions  on  a  profitaWe 

SS^"'  '  **  '•''  "^^  '^  ***  safeguKeir 

rhll  ^  "!?'*?•  "^"^""^  }^^  *  description  supplemented  by 

Un^rs  ?ort&r  °^,  *^'  *^*^  P""^  ^y^^^^  other 
bankers  fortified  themselves,  step  by  step,  against  mistakes 

}hi  „r?  '  "l'""'Se"'«'t,  control  or  organization,  and  at 

to  ™""Vr''^/"T'j  '^  ^  '•^'Pf"'  *°  ""l  bankers 
m  general.    Those  described  in  this   volume  have  been 

mo« '^nt"*  "V*""  ^^''^'^^  experiences  of  a  hundreTor 
more  bankers  of  every  type.  AU  have  been  tried  out  and 
because  they  have  proved  successful  in  solving  some  d^- 
ticular  problem,  they  find  a  place  in  this  book  ^ 

of  thJLT  ♦^^  f  ^°"  «'\'"*  *brough  the  pages  that  many 
ba„k^-!r*^  P'r  ""y  ^  "^  P'^fit^bly  in  almost  any 

M  Jr*  *  •'''"!,"'  "^'^  "'*'«'«  '^'  "o  doubt,  have  to 
^  altered  some  m  order  to  meet  varying  conditions,  but 
this  wiU  m  nowise  affect  the  fundamentals 
nni  ff  ^!"*f  «^<Jent  then  that  the  real  value  of  this  vol- 
ume lies  m  the  many  opportunities  it  affords  you  to  apply 

Md  S^'  "' K,°^'  °^  "*>'  '"^«'«  *°  your  own  creS 

TOu  ^^h^^  r"^™'  1?*^  "^"^  *bese  tested  pUms  before 

M?  o^v  ,^/k  ?'°"'^^  "^  well-defined  comse  to  insure 
not  only  profit,  but  security  as  well. 

xr 


No  essential  phase  of  this  important  division  of  the 
banking  business  has  been  overlooked  in  this  volume,  and 
it  will  be  found  that  among  the  many  plans  and  methods 
described  here,  every  type  of  banking  institution  is  repre- 
sented. More  or  less  recent  legislation  has  given  a  special 
impetus  to  banking  activities  in  rural  communities  and 
those  bankers  who  are  interested  more  particularly  in  farm 
credits  will  find  many  helpful  suggestions  for  extending 
their  business  among  farmers.  This  is  equally  true  of  all 
other  types  of  banks. 

In  the  preparation  of  the  material  for  this  volume  the 
editors  and  publishers  received  generous  cooperation  from 
bankers  throughout  the  country  and  their  whole-hearted 
support  and  assistance  is  gratefully  acknowledged.  Some 
of  these  sources  of  assistance  are  listed  on  the  two  follow- 
ing pages.  Not  only  have  these  bankers  been  generous  in 
relating  their  experiences  and  outlining  their  profit-building 
plans,  but  many  of  them  have  inconvenienced  themselves  m 
order  to  lend  to  the  editors  many  of  their  charts,  diagrams, 
folders,  cards,  and  the  like,  in  order  that  reproduction  might 
be  made  from  them.  Without  this  thoughtful  considera- 
tion from  the  bankers  of  the  country,  this  volume  would 

have  been  impossible.  *  t       u 

The  preparation  of  the  volume  was  in  charge  of  Josepli 
M.  Regan,  assisted  by  James  S.  Baley  and  the  editors  of 
the  Book  Department  of  the  A.  W.  Shaw  Company. 

The  Publishers 


XVI 


AUTHORITIES  AND  SOURCES  FOR 
THIS  VOLUME 


Pj^XCHANGE  National  Bank,  Tulsa,  Oklahoma;  Hibemia 
•*-^  Trust  and  Savings  Bank,  New  Orleans;  Guaranty  Trust 
and  Savings  Bank,  Los  Angeles;  Crocker  National  Bank, 
San  Francisco;  United  States  National  Bank,  Omaha;  First 
National  Bank,  Minneapolis;  Wisconsin  National  Bank, 
Milwaukee;  First  National  Bank,  Milwaukee;  Bank  of 
Burlington,  Burlington,  Wisconsin;  First  National  Bank, 
Grand  Rapids,  Wisconsin;  Peoples  State  Bank,  Traverse 
City,  Michigan;  Peoples  State  Bank,  Detroit;  First  and 
Old  National  Bank,  Detroit;  Bank  of  Detroit,  Detroit; 
Second  National  Bank,  Toledo;  Guardian  Trust  and  Savings 
Bank,  Cleveland;  Bank  of  Buffalo,  Buffalo,  New  York; 
Manufacturers  and  Traders  Bank,  Buffalo,  New  York; 
Security  Trust  Company,  Rochester,  New  York;  National 
Bank  of  Syracuse,  New  York;  Irving  National  Bank,  New 
York;  Old  Colony  Trust  Company,  Boston;  First  National 
Bank,  Philadelphia;  Girard  National  Bank,  Philadelphia; 
Chemical  National  Bank,  New  York;  Chase  National  Bank, 
New  York;  First  National  Bank,  Iowa  City,  Iowa;  National 
Bank  of  the  Republic,  Chicago;  Union  Commerce  National 
Bank,  Cleveland;  National  City  Bank,  Chicago;  First 
National  Bank,  Marengo,  Illinois;  Union  Trust  Company, 
Rochester,  New  York;  Guardian  Trust  and  Savings  Bank, 
Toledo;  Mississippi  Valley  Trust  Company,  St  Louis;  Wa3me 
County  and  Home  Savings  Bank,  Detroit;  First  Trust  and 
Savings  Bank,  Canton,  Ohio;  Marshall  and  Ilsley  Bank, 
Milwaukee;  National  City  Bank,  New  York;  The  Citizens 
Bank,  Anderson,  Indiana;  Citizens  State  Bank,  Jewell, 
Kansas;  Northern  Trust  Company,  Chicago;  First  National 
Bank,  Taylorville,  Illinois;  National  Bank  of  Commerce, 
St.  Louis;  First  National  Bank,  Cleveland;  Northwestern 
National  Bank,  Minneapolis;  Grand  Rapids  National  City 
Bank,  Grand  Rapids,  Michigan;  Old  National  Bank,  Spokane, 
Washington;  Merchants  National  Bank,  Richmond,  Virginia; 
Union  Trust    Company,  Chicago;    Dime  Savings  Bank, 

xvil 


Detroit;  Grand  Rapids  Saving  Bank,  Grand  Rapids,  Mich- 
igan; National  Bank  of  Decatur,  Decatur,  Dlinois;  Farmers 
and  Merchants  State  Bank,  Decatur,  Illinois:  Cedar  Rapids 
Savings  Bank,  Cedar  Rapids,  Iowa;  American  National 
Bank,  St.  Paul;  and  many  others. 


xvffi 


PARTI 


TESTED  METHODS  FOR 
HANDLING  CREDITS 


I 


CHAPTER  I 

PERFECTING  YOUR  CREDIT  RECORDS 

AND  ROUTINE 

THE  First  National  Bank  of  Iowa  City  has  on 
file  the  credit  records  of  a  number  of  people  in 
the  city  and  country  who  never  have  asked  for 
or  borrowed  a  penny.  But  almost  every  man  at  some 
time  needs  extra  money  and  this  bank  doesn't  have 
to  "beat  aroimd  the  bush'*  with  apphcants  and  make 
them  wait  until  its  officers  can  make  the  necessary 
investigations.  The  president  usually  can  tell  from 
his  forehanded  records  (Figure  1)  whether  he  can  extend 
the  credit  asked  for  or  not. 

This  is  just  one  plan  which  both  small  and  large 
progressive  banks  have  adopted  to  perfect  the  organi- 
zation of  their  credit  and  collection  department. 

The  last  few  years  have  seen  important  changes  in 
banking  credits,  that  date  back  from  the  old  method 
of  pigeonhoUng  credit  information  in  one's  memory  to 
the  modern  methods  of  having  in  the  files  the  most 
complete  records  available  of  borrowers  and  possible 
applicants.  Bankers  generally  agree  that  with  the 
growth  of  the  banking  business  the  greatest  competi- 
tion of  the  future  for  bankers  will  focus  itself  on  credit 
facilities.  This  means  that  the  importance  of  credits 
will  have  to  be  measured  accordingly.  Admittedly  the 
sort  of  service  a  banker  can  give  in  granting  credit  and 
the  real  cooperation  he  can  extend  to  customers  will 
l^ve  much  to  do  with  the  growth  of  his  business  and 
the  upbuilding  of  his  profits. 


J 


)i 


2 


TESTED  CREDIT  METHODS 


For  this  reason  the  credit  activities  of  a  bank  neces- 
sarily must  be  clearly  defined  and  well  organized.  It 
is  not  practicable  nor  always  possible  with  the  present 
development  of  banking  to  know  personally  the  life 
history  of  every  borrower;  to  retain  a  mental  picture 
of  his  character,  capacity  and  capital;  and  to  make 
loans  safely  with  no  records  or  guideposts  of  some  sort 
in  the  files  to  refer  to.  Auxiliary  facts,  aside  from 
personal  friendship  and  acquaintance,  are  essential  if 
not  entirely  necessary.  And  it  doesn't  matter  whether 
a  bank  is  small  or  large,  whether  the  credit  activities 
are  dignified  by  the  name  ** department"  or  not,  the 
need  of  having  every  facility  possible  to  expedite  the 
handling  of  credits  is  very  real. 

Therefore,  this  and  succeeding  chapters  will  describe 
in  detail  how  the  credit  department  is  organized  and 
how  it  functions  in  everyday  tested  practice.  This 
information  dovetails  somewhat  with  the  plans  for 
handling  the  routine  of  loans  and  discounts,  set  forth 
in  another  volume  of  the  Shaw  Banking  Series  under 
that  name.    In  this  book,  then,  will  be  considered: 

1.  The  organization  of  the  credit  department. 

2.  Preparing  the  credit  offerings  for  the  discount  committee. 

3.  How  to  classify  risks. 

4.  Gathering  and  furnishing  credit  information. 

5.  Analyzing  financial  statements. 

6.  Watching  customers'  finances  and  making  investigations. 

7.  Determining  lines  of  credit. 

8.  How  to  handle  the  farmer's  business. 

9.  Guarding  against  losses  by  making  audits. 

10.  Keeping  in  touch  with  market  conditions. 

11.  How  to  cooperate  with  mercantile  agencies. 

12.  Methods  of  filing  credit  information. 

13.  Time-saving  equipment  for  the  credit  bureau. 

14.  Handling  collections  and  similar  problems. 

15.  The  routine  of  the  trade  acceptance. 

The  mechanical  phase  of  loan  making,  of  course,  is 
only  supplementary  to  judging  credit  risks  and  insuring 


Sayi  Good  wHhirt  Sturitv  far  i 


Mr. 


Mr. 


PrMideni 


Cashier 


J- 


\ 


MEMORANDA 


Date 

Ratlna  Number                  Namp 

" 

Owes  Us                        Oecuoation 

■" 

Net  Worth 

Banlcs  with 

— 

p^      ) Good  without  SMiirity  for  $ 

^,,___^                                                                                              DFAI       CCTATF                                                                

Acres 

Lots 

Township 
or  City 

County 

State 

Est 
Value 

Incumbered 

Mortgage  | 

= 

; 

s 

- 

- 

- 

1  Kind 

Condition 

Est  Value 

Incumbered 

Mortgage 

Above  Given  byl 

s 

Reputation 

■ 

><J 

REMARKS: 

Figure  1 :  An  Iowa  banker  knows  all  about  most  of  the  people  of  his 
community  and  county  as  credit  risks  because  he  keeps  this  useful 
"liabiUty  ledger"  and  information  file.  A  glance  at  one  of  these 
•heets  usually  tella  him  whether  an  applicant  is  entitled  to  borrow. 

8 


!■ 


4  TESTED  CREDIT  METHODS 

safety  to  the  bank.  For,  after  all,  no  matter  how 
smoothly  the  routine  is  oiled  by  perfected  systems, 
unless  the  credit  man  knows  well  his  applicant  and 
analyzes  correctly  this  human  element  behind  all  the 
figures,  the  bank  will  not  be  reasonably  safeguarded. 

The  first  requisite,  therefore,  for  any  bank,  whether 
large  or  small,  is  to  choose  the  right  sort  of  credit 
man — the  basis  of  an  adequate  organization.  To 
many  this  will  seem  so  obvious  as  to  be  wasted  words, 
but  investigation  of  banks  in  many  sections  indicates 
that  there  is  too  strong  a  tendency  for  banks  to  have 
a  man  in  charge  of  credits  who  has  not  the  broad  vision 
to  handle  his  department  satisfactorily.  He  may  be 
too  genial  or  he  may  be  too  firm.  Perhaps  he  still 
believes  in  trusting  to  the  information  he  has  pigeon- 
holed in  his  "ofl&ce  hat."  He  may  hold  the  job  simply 
because  he  is  popular  about  town  or  because  his  father 
had  money  before  him. 

These  and  many  other  factors  sometimes  influence 
a  credit  man's  appointment,  at  least  subconsciously. 
In  a  small  bank  he  may  not  carry  that  particular  title. 
He  may  be  the  president,  the  vice-president,  the  cashier, 
or  the  assistant  cashier.  That  makes  Httle  difference. 
The  important  point  is  for  every  banker  to  tackle 
this  problem  anew  and  see  whether  the  credits  of  the 
bank  are  handled  just  as  wisely  as  they  ought  to  be. 

A  bank  credit  man,  briefly,  should  combine  many 
qualities.  He  should  be  firm — of  positive  quaUties.  On 
the  other  hand,  he  should  be  able  to  make  customers 
and  prospective  customers  **feel  at  home"  when  he 
greets  them.  Ideally,  he  will  have  an  application 
tactfully  sized  up  before  it  comes  to  the  discount 
committee.  His  recommendation  will  usually  be  right. 
He  should  understand  psychology  and  judge  character 
fairly  well  and  he  should  know  how  to  cater  intelli- 
gently to  customers'  needs.  Especially  are  these 
qualities  necessary  to  meet  banking  competition.   The 


LINING  UP  THE  WORK  5 

small  bank,  more  so  than  the  larger  one,  must  give 
more  attention  than  ever  before  to  this  particular 
phase  of  the  business. 

Assuming  that  a  bank  has  made  a  wise  choice  of  a 
credit  officer,  the  proper  organization  of  the  depart- 
ment, vhether  in  a  small  or  large  bank,  is  the  next 
step.  is  not  the  purpose  of  this  chapter  to  take  up 
every  »  tail  of  such  an  organization  because  each 
bank  h  different  problems.  The  following  pages, 
therefore  vill  indicate  some  of  the  ways  found  useful 
by  progre    ive  banks  to  handle  credits  satisfactorily. 

THIS  EFFECTIVE  CREDIT  SYSTEM  HELPS  TO  INSURE 
QUICK  SERVICE  TO  YOUR  CUSTOMERS 

No  matter  what  the  size  of  a  bank,  the  fundamentals 
of  any  successful  plan  apply  to  any  bank  irrespective 
as  to  size,  so  that  the  ideas  and  tested  plans  presented 
here  should  offer  valuable  suggestions  to  almost  any 
banker  for  improving  his  credit  vision  and  routine. 
Any  help  of  this  sort  obviously  creates  new  business 
opportunities  for  bankers. 

Let  us  first  consider  the  plan  of  the  Iowa  bank 
mentioned  at  the  beginning  of  the  chapter.  The  figure 
illustrated  represents  a  very  simple  record,  but  it  is 
worth  a  lot  of  money  to  the  bank. 

"In  these  days  of  keen  competition,  when  an  appli- 
cant will  walk  out  and  go  to  the  next  place  if  you  don't 
take  care  of  him  promptly,  a  record  like  this  is  indis- 
pensable,'* says  W.  J.  McChesney,  the  president. 
*' And  it  isn't  difficult  to  keep.  In  it  are  sheets  covering 
not  only  a  record  of  all  oiu*  loans,  but  possibiUties  for 
loans  as  well.  We  call  it  our  liabiUty  ledger,  although 
it's  a  mighty  important  fund  of  information,  too. 

*'We  make  out  a  sheet  for  every  farmer,  merchant, 
or  individual  we  know  of  in  the  community  or  sur- 
rounding district,  whether  a  customer  of  owe  bank  or 
not.    We  figure  that  some  day  one  of  them  may  be  a 


6 


TESTED  CREDIT  METHODS 


prospect  for  a  loan  at  our  bank  even  if  he  is  not  now. 
Perhaps  we  may  have  no  information  whatever  at  the 
stert.  But  httle  by  Uttle  we  find  out  and  jot  down 
the  various  facts  about  a  prospective  borrower.  Then, 
when  a  farmer,  for  instance,  who  has  never  been  a 
customer,  apphes  for  a  loan,  we  probably  have  aU 
the  mformation  we  need  about  him  on  one  of  these 
sheets  and  can  grant  or  refuse  the  request  without 
mabng  him  wait  a  week  or  go  to  another  bank. 

We  coUect  our  information  largely  by  being  wide 
awake  to  any  remark  we  may  overhear.  For  example 
a  farmer  customer  may  drop  in  merely  to  say  'heUo!* 
We  may  talk  for  a  moment  or  two,  and  in  the  course 
of  the  convereation  he  may  casually  mention  some 
miportant  incident  bearing  on  his  own  or  his  neighbor's 
financial  condition.  We  make  a  note  of  the  fact  and 
teter  have  it  transferred  to  the  Uability  ledger  sheet. 
Our  valuable  fund  of  credit  information  is  the  result 
of  keeping  tab  on  all  items  of  this  sort.  It  is  really  a 
gold  nunc  of  credit  material.    How  does  it  work? 

K  ^^^I  -J'^™®  ™  *^®  °**^^^  <lay  and  wanted  to 
borrow  $500  for  90  days.  He  was  not  a  customer, 
but  he  leaned  over  the  railing  half  tunidly,  and  half 
expectantly,  and  told  me  who  he  was. 
I  j"'^'^*TT^  moment,'  I  said  as  I  opened  my  UabUity 
ledger  His  sheet  was  there.  I  instantly  saw  that  he 
was  the  owner  of  a  farm  worth  $40,000.  I  would 
gladly  have  lent  him  $15,000.    I  turned  and  said: 

Yes,  certainly,  Mr.  Burton,  we  wiU  be  glad  to 
accommodate  you.' 

"And  in  less  than  10  minutes  he  had  his  money 
and  was  thanking  me  for  our  service.  That  is  what  I 
consider  an  approach  to  real  banking.  Does  anvone 
suppose  methods  Uke  this  can  fail  to  bring  many 
doUars  of  profits  to  a  medium-sized  bank  Uke  ours?" 
These  ledger  sheets  (Figure  1)  as  you  wiU  see. 
provide  for  entries  on  both  sides.    Spaces  are  included 


LINING  UP  THE  WORK  7 

t 

on  the  front  for  entering  the  most  basic  credit  infor- 
mation and  for  showing  the  amount  of  real  estate  or 
personal  property  owned,  if  any.  The  reverse  has 
spaces  for  comments  of  officers  and  friends  on  the 
risk.  Below  is  ample  space  for  incidental  facts  about 
the  prospective  borrower  which  we  have  picked  up. 
^  In  this  banker's  own  words  the  liability  ledger — one 
simple  record — went  a  long  way  toward  perfecting  his 
credit  organization.  Another  bank  keeps  a  somewhat 
similar  record,  and  adds  to  it  the  names  of  all  new 
depositors  promptly. 

COURTESY  TO  VISITORS  DOES  NOT  COST  ANYTHING 
BUT  IT  OFTEN  BRINGS  BIG  RETURNS 

^  Investigation  indicates  that  many  bankers  no  longer 
give  a  cold  welcome  to  applicants  who  are  not  cus- 
tomers. Instead  of  the  old  stereotyped  question, 
"Have  you  an  account  with  us?'*  in  response  to  the 
appUcant's  request  for  a  loan,  bankers  realize  the 
importance  of  receiving  the  appHcant  cordially  and 
perhaps  obtaining  a  worth-while  customer  or  at  least 
making  a  friend.  It  is  not,  therefore,  considered  good 
banking  business  to  turn  an  inquirer  down  cold  simply 
because  he  is  not  a  depositor.  And  yet  this  has  been 
the  practice  in  some  banks.  The  new  idea  of  service, 
however,  extends  to  credits  as  well  as  to  Christmas 
clubs  and  other  activities. 

A  Missouri  bank  makes  its  loans  intelHgently  by 
having  complete,  convenient  records  of  all  its  cus- 
tomers' activities.  For  instance,  the  credit  manager 
has  one  card  file  which  shows  graphically  the  relations 
of  every  customer  with  each  department  of  the  bank. 
These  cards  (Figure  2),  which  are  about  7  by  9}/^ 
inches  in  size,  provide  for  more  information  than  the 
ordmary  average  balance  card.  Besides  the  balances 
and  the  average  loans  which  are  entered  on  the  reverse 
side,  spaces  are  included  for  showing  whether  or  not 


I 

I 


Name 

Collateral  Loan  Demand 

Indoraore 

Offlcarsor  Partmrs 

BusintM 

Collateral  Loan  Time 

Address 

Unsecured  Loan  Demand 

ResideoM 

Unsecured  Loan  Time 

Introduced  by 

Real  Estate  Loan 

Affiliations  with  Otiwr 
Oepartments 

Affiliations  with  Other 
Customers 

Checks  Returned 
Because  of  In- 
sufficient Funds 

Ovsrdraft 
Record 

C/A  Opened 

Bond  Department 

Real  Estate  Department 

Opening  Entry 

S.  D.  Department 

Trust  Department 

Account  Closed 

Farm  luMn  Department 

C/D 

S/A 

Reference  or 

Agency  Rating 

Stockholder 

I  ■■- 

AVER 

AGESI 

MLANG 

£S  AN 

D  LOM 

IS  (h?; 

NSl 

icoi 

Jan. 

■■■ 

, 

I                   1 

Feb. 

Mar. 

mm^mm 

Apr. 

May 

June 

^^^~ 

July 

^BMM* 

Aug. 

■ 

"   "" 

Sept 

■^■"^ 

Oct 

imimimm 

Nov. 

m^tm^ 

Dec 

Yearly  Average 

Yearly  Average 

C/A  Balane*    DtUrn     

f 

-"             1 

s«rf"g«     

% 

r./n 

t 

■    ■     : 1 

1 

Figure  2:  The  credit  manager  of  a  middle-western  bank  keeps  close 
tab  on  his  customers  with  a  file  of  cards  like  this  one.  The  front  of 
the  card  provides  for  information  on  the  borrower's  activities  in  other 
departments.    Average  loans  are  entered  on  the  reverse  side  in  red. 

8 


CREDIT  STATEMENT 

(To  be  attached  to  each  ix>te  otf ered  (or  redboouBt ) 
Commerdal  or  laduatrwl 

To  the  Federal  Reserve  Bank  of  Chicago 

Nanie____ 

Address 

Business . 

Dale  of  last  Statement 


Cash  on  Hand. 


ASSETS 


Bills  and  Accounts 
Receivable — good 
Merchandise — good 
Real  Estate  and) 
Buildings           )__ 
Otho  Assets 


Tbtu. 


LIABILITIES 


Bills  Payable 

Accounts  PayaUe. 

Mortgage  or    | 
Bonded  Debt) 

Other  Liability 

Capital 


Surplus  and  Profits. 
Total 


Contingent  Liability- 
Annual  Business 

Profit  last  Year 

Loss  last  Year 


.$- 
.$. 
.$. 
-$. 
.$. 
.$. 


Purpose  (or  which 
this  Loan  %vas  made 

To  die  best  of  my  knowledge  and  bdiel  die  statements  furnished  herein 
are  true  and  in  accordance  with  the  facts. 

Bank 


Figure  3 :  The  basic  facts  necessary  for  a  banker  to  know  about  every 
borrower  are  lined  up  concisely  on  this  form,  which  is  furnished  by 
the  Federal  Reserve  Bank  to  cover  each  piece  of  paper  offered  to  it  for 
rediscount.  This  statement  provides  a  valuable  guide  for  sizing  up  risks. 

9 


I 


10 


TESTED  CREDIT  METHODS 


I 


fi 


the  customer  has  had  business  with  other  departments 
of  the  bank  and  whether  he  has  trade  affiliations  with 
other  customers.  Notice,  too,  that  a  record  is  kept 
of  checks  returned  for  insufficient  funds,  as  well  as  over- 
drafts.   The  average  loans  are  entered  in  red. 

In  practice  this  card  has  proved  effective  in  keeping 
officers  well  informed  of  each  customer's  activities. 
The  expense  has  been  slight  in  comparison.  As  the 
largest  percentage  of  requests  for  loans  from  this  bank 
come  from  customers  who  carry  current  or  checking 
accounts,  a  plan  Hke  this  is  of  considerable  import, 
because  each  card  indicates  quickly  any  shortcoming 
that  would  bar  a  customer  from  receiving  a  loan. 

Of  course,  from  every  depositor  who  wishes  to  secure 
credit  is  required  a  statement.  The  form  varies  some- 
what according  to  local  clearing  house  regulations,  and 
so  on.  However,  the  basic  information  necessary  to 
know  is  set  forth  on  the  form  (Figure  3)  which  the 
Federal  Reserve  Banks  require  to  accompany  all  paper 
presented  to  them  for  rediscount.  Methods  of  getting 
customer  statements  are  described   in  Chapter  VI. 

As  soon  as  all  available  information  on  a  customer 
has  been  obtained  the  credit  manager  and  his  assistants 
analyze  it  and  make  up  a  simamarized  digest  of  it. 
If  the  depositor  has  already  applied  for  a  loan,  the 
credit  department  prepares  the  information  for  the 
discoimt  committee.  The  Union  Commerce  National 
Bank,  of  Cleveland,  compiles  this  digested  summary 
under  the  following  headings: 

1.  Investigations,  interviews,  and  so  forth 

2.  Mercantile  reports 

3.  Correspondence 

4.  Miscellaneous 

All  this  data  goes  into  a  special  credit  folder  (Figure 
4)  so  that  the  discount  committee  or  credit  officer  can 
expeditiously  run  over  the  facts  and  make  a  decision. 


LINING  UP  THE  WORK  II 

This  folder  has  heavy  board  covers  and  is  10  by  15 
inches  in  size.  Instructions  on  the  front  read:  "This 
folder  must  be  returned  to  the  credit  department 


/ 


•f^m^'^m  II      .1  mn 


lnywtii«ttows>^\/Merc«ntile  RtportK/ Ciifrespondence\/^  WsceHaneous  \ 
views  and  so  fortn  — *""^^^""—.-ii^^^w 


twviewsi 


IMS  liiidcr  mwt  |i  1^^ 
tilt  CfMlK  ^Bptitnwit  Mfftett  pMtibto 
tnomsnt. 

PtasM  do  Mt  boki  in  dndc  «mr 
nigtit 


Figure  4:  This  time-saving  folder  was  arranged  by  a  Cleveland  bank 
for  filing  a  summary  of  the  financial  standing  of  each  borrower.  It 
enables  the  lending  officers  to  find  out  the  important  facts  quiddy. 

earliest  possible  moment.  Please  do  not  hold  in  desk 
overnight."  The  credit  department  takes  this  pre- 
caution because  it  would  require  considerable  effort 
and  expense  to  replace  a  batch  of  information  of  this 
sort.  Each  folder  is  filed  alphabetically  in  steel  files. 
It  is  a  great  convenience  to  have  all  information  for 
each  customer  filed  in  the  one  folder. 

Many  banks  are  adopting  this  idea,  in  one  way  or 
another.  A  middle-western  bank  keeps  the  required 
credit  data  for  each  customer  within  the  covers  of  a 
folder,  which  is  itself  one  of  the  record  forms,  thus 
condensing  the  information  to  the  least  possible  space. 

When  a  new  business  account  is  opened  the  folder 
(Figure  5)  is  prepared.    On  the  inside  of  the  front 


i 


If 


ll 


INTENTIONAL  SECOND  EXPOSURE 


10 


TESTED  CREDIT  METHODS 


the  customer  has  had  business  with  other  departments 
of  the  bank  and  whether  he  has  trade  affihations  with 
other  customers.  Notice,  too,  that  a  record  is  kept 
of  checks  returned  for  insufficient  funds,  as  well  as  over- 
drafts.   The  average  loans  are  entered  in  red. 

In  practice  this  card  has  proved  effective  in  keeping 
officers  well  informed  of  each  customer's  activities. 
The  expense  has  been  slight  in  comparison.  As  the 
largest  percentage  of  requests  for  loans  from  this  bank 
come  from  customers  who  carry  current  or  checking 
accounts,  a  plan  hke  this  is  of  considerable  import, 
because  each  card  indicates  quickly  any  shortcoming 
that  would  bar  a  customer  from  receiving  a  loan. 

Of  course,  from  every  depositor  who  wishes  to  secure 
credit  is  required  a  statement.  The  form  varies  some- 
what according  to  local  clearing  house  regulations,  and 
so  on.  However,  the  basic  information  necessary  to 
know  is  set  forth  on  the  form  (Figure  3)  which  the 
Federal  Reserve  Banks  require  to  accompany  all  paper 
presented  to  them  for  rediscount.  Methods  of  getting 
customer  statements  are  described   m  Chapter  VI. 

As  soon  as  all  available  information  on  a  customer 
has  been  obtained  the  credit  manager  and  his  assistants 
analyze  it  and  make  up  a  summarized  digest  of  it. 
If  the  depositor  has  aheady  apphed  for  a  loan,  the 
credit  department  prepares  the  information  for  the 
discount  conunittee.  The  Union  Commerce  National 
Bank,  of  Cleveland,  compiles  this  digested  summary 
under  the  following  headings: 

1.  Investigations,  interviews,  and  so  forth 

2.  Mercantile  reports 

3.  Correspondence 

4.  Miscellaneous 

All  this  data  goes  into  a  special  credit  folder  (Figure 
4)  so  that  the  discount  committee  or  credit  officer  can 
expeditiously  run  over  the  facts  and  make  a  decision. 


LINING  UP  THE  WORK 


11 


This  folder  has  heavy  board  covers  and  is  10  by  15 
inches  in  size.  Instructions  on  the  front  read:  **This 
folder  must  be  returned  to  the  credit  department 


r 


'{'SSm^^^^^^^^'^^  R»pofts\Xcorrespondenc»\/  WsceWaneous A. 


'^fWfVf' 


This  folder  must  bo  retnmei]  to 
the  credK  department  earliest  possible 
moment 

Please  do  not  hold  in  desk  over 
nigtit 


Figure  4:  This  time-saving  folder  was  arranged  by  a  Cleveland  bank 
for  filing  a  summary  of  the  financial  standing  of  each  borrower.  It 
enables  the  lending  officers  to  find  out  the  important  facts  quickly. 

earhest  possible  moment.  Please  do  not  hold  in  desk 
overnight."  The  credit  department  takes  this  pre- 
caution because  it  would  require  considerable  effort 
and  expense  to  replace  a  batch  of  information  of  this 
sort.  Each  folder  is  filed  alphabetically  in  steel  files. 
It  is  a  great  convenience  to  have  all  information  for 
each  customer  filed  in  the  one  folder. 

Many  banks  are  adopting  this  idea,  in  one  way  or 
another.  A  middle-western  bank  keeps  the  required 
credit  data  for  each  customer  within  the  covers  of  a 
folder,  which  is  itself  one  of  the  record  forms,  thus 
condensing  the  information  to  the  least  possible  space. 

When  a  new  business  account  is  opened  the  folder 
(Figiu-e  5)  is  prepared.     On  the  inside  of  the  front 


•     f 


i  * 


^Wt^Wg^fevBUSINPS  AND  TBADE  CTYIEI       ^..^.f:...  ,(7,^^,,,  -T^.^l 
i» J    I    BIIAMCHES  ^ 


NAME 
ADDIt 
INTROOUCEO  BY 


OyniDE  AFFILIATIONS 


ACCOUNTS  INFLUENCED  AND  0THE8  LOANS  MADE 


ACCEPTED  IT 


INTEREST 

OPENED  ^h^ I  IS- mm 


OTHER  BANKS  BROKE! 


CLOSED 


USED TO  PAPER  ALSO  RECEIVED  FROM 


CHAROE 


tAmJ    VtLLet  ^/f^JA^ 


Figure  5:  How  completely  and  compactly  credit  information  may  be 
kept  is  evidenced  by  this  illustration  of  the  inside  front  cover  of  an 
effective  credit  folder.  A  great  deal  of  information  is  listed  here,  in- 
cluding the  borrower's  average  balance  over  a  three-year  period. 

12 


•t 

.!« 

^^ 

^^ 

B^aa 

Matmaa 

■■ 

—mm 

■■ 

artri»»— 

— 

— 

Janklna, 

farkor  ft  Talfar.                                Purnlturo                                                   Peapoll.  Nob. 

oiuAKAKTOM                                                                                                                                                                                                                                                                 ~ 

OB  iMOOMMt     Am  Hoatk  t  Suucl  Clark    $10CM  4/2i/)e                                                           PATsa  moM 

D«a 

Jan.    IS 

Jan     16 

Jan.   17 

Q<.<ct  JUMi 

• 

293 

2-|« 

279 

^ 

t 

361 

0- 

* 

M 

t 

M 

( 

M 

«" 

M 

% 

M 

t 

m}. 

M 

CwTWt  k»MH«« 

irs 

4 

132 

3 

116 

0 

BmQiMk  AMm 

120 

8 

147 

3 

245 

0 

■~1 

lUTIO 

I  ,TO 

2,1 

3   11 

Oltor  hmwu 

1 

7^ 

1 

4 

2 

9 

~^ 

~ 

C«»MA»««I« 

■  NST 

leo 

0 

100 

0 

roo 

0 

~ 

kiM  rMf 

WOMTM 

22 

6 

48 

7 

47 

»■ 

~ 

■i»i.»H.«»«il>i< 

- 

IMOOMUMUmaM 

"■ 

■■I  1   1  m  Umn   ladrtl 

~ 

TMrf^M 

13 

S 

13 

3 

27 

0 

~ 

1 

. 

Xmtl  UwrfMin 

Lw* 

OIBCCT 

■■ 

h— 

~ 

•*»• 

BUhMR 

orricCn    am  NMth                       •*"                                                 v»..f».                                       i^,  snau,!  ciark  C  ■  ft   '"'»■ 

riurrNcat 

- 



Peurth  Hattoiuil  Baak.  St     Louis.  Mo. 

Do  Bol;   fln<f  Cfpvftnv  haa  Nev  York  banklr^c  connaction  at   this  tlM.    ) 

J    H    Spcncor.   Vleo-Pros 

Kanaaa  City  bank  chackioj^i,  ar^   favorabla  and  indicate  coBoanv  la   / 

ennBlrl«r*d    eoanAti>nt                i 

' 

Hoath  la  diraetor  in  Fourth  National  and  Praa.   ft  Tr«as     of  Aaa  / 

Haath.   tnc   .   and  A.   T    H.  Ca«pany.   Inc.     At  tlaaa  their  float 

V 

_^^ 

Indabtadnaaa  is  rather  laru.   ovlnc  to  the  fact  that  they  a«t 

^£ 

^_ 

sold,   this  credit  belnc  extended  by  their  banks      They  flnj 

^ 

tHe  W.   L    Cowany  of  Jevell.   output  belnt  aold  by  oo  comV 

^  t 

__^ 

basis.     Have  taken  lease  on  >    City  Coansny  athlch  will 

y 

the  T.   G.   L    Coapany  and  output  sold  by  thea  on  coaalssj 

*  • 

iias 

1 

T.   L    Cary 

has  had  considerable  experience,   said  to'ba  the  aetlTa/ 

— 

Mtrcbanta  Hatlooal  B«ak.  Po«p*U 
t.  M    *  .  eashl.r.         ^^ 

Socarltir  Bask.   I>«ap«ll 

ATS.  Aaat.  UabUr 

for  an  Increase  in  loans  to  I7SII  or  SSOM.     Advised  t 
arafer  nbt   to  Increase  line  with  thea  at  present. 

aad  eve  at  Draaent  «1CM.     Other  bank  holds  S40M  of/ 
btlnc  tSOM      Continue  In  cood  credit  and  staodlni/ 

r 

E 

T.  L    Canr 

CltlMna  National,    cmcago 

rreousAtly   loan  requireaenU.     Their  2  bank 
loan  coaoany  freely.     Stateaent  does  not  sh< 
of  quick  aaseta  over  CA  as  we  should  like  < 
Asreed  to  line  of  tTSII.     Micht  consider  a  1. 
MtUfactory  explanation.                                  7 

»re  y 

1  ty 

jK  of 

jfe  an 

/to  S60lt 
h.  did 

AdTlaad 

— 

Ralttlons  continue  on  aaae  basis       Line  «/ 
now  has  out  t4QII  and  since  Deo.    1S16  It  / 
continuous  borrower,   althouch  at  tlaaa  / 

yhrauuiL.. 

Advices  Ihrouthout  other  sources  tadlo 

r 

r 

sUtMsnts  Judce  it  to  Be  a  cood  rlahT 

/ 

/ 

/ 

/                                / 

■ 

^ 

/ 

^"~~ 

h^ 

ZI 





- 

— 

L. 

== 

»^ 

V 

:is 

^ 

i 

1 

— 

- 

Figures  6  and  7:  This  card  provides  additional  credit  facts  about  the 
customer  and  goes  into  the  folder  shown  in  Figure  5.  When  the  lower 
part  of  the  card  has  been  filled  in  with  data,  a  sheet  gummed  at  the 
upper  edge  (Figure  7),  is  attached  as  indicated,  to  permit  further  entries. 

13 


.f 


14  TESTED  CREDIT  METHODS 

cover  space  is  provided  for  a  great  deal  of  general 
information  regarding  the  account;  for  a  statement  of 
tne  average  balances  from  month  to  month,  and  also 
for  the  amount  of  the  line  of  credit  and  so  on.  The 
Illustration  shows  the  condition  of  an  account  over  a 
period  of  three  years,  and  the  entries  cover  a  fund  of 
valuable  information  for  the  lending  officer. 

^^A^Sr™;,jr^^^^^  CREDIT  RECORDS  ARE  SIMPLY 
A  MATTER  OF  SUITING  YOUR  REQUIREMENTS 

After  the  folder  is  made  out,  a  white  ruled  card  of 
the  same  size  is  headed  up  (Figure  6).  This  provides 
a  record  of  the  assets  and  liabilities,  of  the  net  worth, 
of  the  dividends,  and  so  on.  It  also  serves  as  an 
abbreviated  record  of  all  the  correspondence  received 
trom  tune  to  tune  regarding  the  account.  When  an 
account  has  run  long  enough  to  fiU  up  all  the  space  on 
the  card,  sheets  of  white  paper  with  a  gummed  edge 
along  the  top  (Figure  7)  are  used  for  further  summaries 
of  the  correspondence. 

Let  us  take,  for  example,  the  item  shown  under  the 
date  of  September  18,  1916,  headed  ''T.  L.  Gary" 
with    the    notation    ''Citizens    National,    Chicago" 
underneath.    This  indicates  that  the  bank  named  has 
written  a  letter  of  mformation  about  Cary  and  that  the 
letter  is  in  the  folder  for  reference  at  any  time.    If  the 
lending  officer  is  extremely  busy  and  does  not  want 
to  spare  the  time  to  look  over  letters  of  this  sort,  he 
can  see  from  these  notations,  the  gist  of  them  at  a 
glance.     As  the  bank  receives  each  letter  or  report 
bearmg  on  an  account,  it  is  smnmarized  as  indicated 
ajid  then  placed  in  the  folder.    It  is  worth  notmg  that 
the  customer's  card  itself  provides  spaces  for  entering 
the  ratio  of  his  quick  assets  to  liabihties  and  also  for 
registering  his  dividend  percentage.    Thus  the  illustra- 
tion shows  that  in  January  1915  the  ratio  was  1  7 
and  in  January  1917,  3.11.    Comparing  these  figured 


NOTES  MATURING. 


IndoraerC'r^ 
OutrantorCO": 
or  Collateral 


Amount 


Pjid 


Hawr 
DispoM 


Uae 


Total 

Amount 

Owing 


Lan 
CImd^ 

Remarka 


Average 

Balance 

Last 

Month 


IBUated. 


(MW 


I 


I 


Figure  8:  The  lending  officers  of  one  bank  save  time  during  rush 
hours  by  using  this  record  for  maturing  loans.  The  complete  informa- 
tion given  makes  it  imnecessary  to  refer  constantly  to  the  credit  files 


STATK 


BANK 


ncnooucBDBY 


ACC^PTBPBV 


AIFIUATBD  ACCQinCB^ 
'tfklJED 


INTSSEST 


TnsT 

DEPosrr  $ 


cj.f)SfrT^ 


NAMK 


MEMORANDUM  OF  ARRANGEMENT. 


ADX^B^ 


JBUSZNBSS  ' 


CHARACTER  OF  ACCOUNT 


OPENED 


CLOSED 


DEPosrr.s 


ACCOUNTS  APFILIATBD 
.AND  INPLUBNCED 


INTSRBST 


HANDLING  CHASQB 


iNTBQDUCBDBr        AOCBFTBD  BY 


[ 


THE  NATIONAL  CSTT  BANK  OPC8ICAGO 


ti 


Figure  9:  These  cards,  one  for  a  record  of  correspondent  bank 
accounts  and  the  other  for  commercial  depositors,  serve  their  purpose 
wcU  for  a  western  bank.     Balances  are  entered  on  the  reverse  side. 

15 


I. 


16 


TESTED  CREDIT  METHODS 


with  the  dividends  of  13.5  m  January  1915  and 
27.0  in  January  1917,  the  bank  can  teU  at  a  glance 
whether  or  not  the  company  is  making  money  and  how 
this  money  is  bemg  distributed. 


Name 


Address 


Send  request  to 


1914 


1919 


-iBW 


1920 


1916 


1921 


1917 


1922 


1918 


1923 


Figure  10:  This  alphabetical  card  record  keeps  the  financial  state- 
ment file  up  to  date  for  one  bank.  The  number  on  the  guide  tip  indi- 
cates the  month  a  statement  is  due.    Page  21  explains  the  plan  fully. 

Thus  the  folder  can  be  made  to  perform  a  decidedly 
effective  service  in  simpUfying  the  granting  of  credits, 
and  in  facihtating  the  examination  of  mercantile  and 
industrial  credits.  In  much  the  same  way  the  task 
of  handhng  maturing  notes  from  day  to  day  is  simplified 
by  the  use  of  a  form  (Figure  8)  which  is  placed  on  the 
lending  officer's  desk  each  morning.  This  record  is 
especially  valuable  since  it  indicates  at  a  glance  the 
disposal  of  notes  and  other  information  equally 
pertinent,  such  as  the  total  amount  owing,  the  last 
clean-up,  and  the  average  balance  for  the  preceding 
month.  This  average  balance  is  determined  by  the 
bookkeepers  after  an  examination  of  the  ledger,  and 


16 


TESTED  CREDIT  METHODS 


with  the  dividends  of  13.5  in  January  1915  and 
27.0  in  January  1917,  the  bank  can  tell  at  a  glance 
whether  or  not  the  company  is  making  money  and  how 
this  money  is  being  distributed. 


rT\ 


Name 


Address 


Send  request  to 


1914 


1919 


191& 


1920 


1916 


1921 


1917 


1922 


1918 


1923 


Figure  10:  This  alphabetical  card  record  keeps  the  financial  state- 
ment file  up  to  date  for  one  bank.  The  number  on  the  guide  tip  indi- 
cates the  month  a  statement  is  due.    Page  21  explains  the  plan  fully. 

Thus  the  folder  can  be  made  to  perform  a  decidedly 
effective  service  in  simplifying  the  granting  of  credits, 
and  in  facihtating  the  examination  of  mercantile  and 
industrial  credits.  In  much  the  same  way  the  task 
of  handling  maturing  notes  from  day  to  day  is  simpUfied 
by  the  use  of  a  form  (Figure  8)  which  is  placed  on  the 
lending  oflficer's  desk  each  morning.  This  record  is 
especially  valuable  since  it  indicates  at  a  glance  the 
disposal  of  notes  and  other  information  equally 
pertinent,  such  as  the  total  amount  owing,  the  last 
clean-up,  and  the  average  balance  for  the  preceding 
month.  This  average  balance  is  determined  by  the 
bookkeepers  after  an  examination  of  the  ledger,  and 


ir 


INSERT  I 


1^ 


YEARLY  AVERAGE 

YEAR 

AVERAGE 
BAUNCE 

MAX.  AND 

MIN. 

LOANS 

MONTH 

MAX.  AND 
MIN.  AVE. 
BALANCE 

MAX.  AND 

MIN. 

LOANS 

MAX.  AND 
MIN.  AVE. 

BALANCE 

1 

MAX.  AND 

MIN. 

LOANS 

MAX.  AND 
MIN.  AVE. 
BALANCE 

MAX. AND 

MIN. 

LOANS 

MAX.  AND  MAX.  AND 
MIN.  AVE.      MIN. 

BALANCE      LOANS 

1      — '^ — 1 — 

MAX.  AND  MAX.  AND 
MIN.  AVE.      MIN. 
BALANCE      LOANS 

. . 

MAX.  AND 
MIN.  AVE. 
BAUNGE 

1 — 

MAX.  AND 

MIN. 

LOANS 

"1 

MAX.  AND 
MIN.  AVE. 
BAUNCE 

1 

MAX.  AND                              ^^ 

MIN.                                 (^ J 

LOANS                                \^ 

1 — 

1 

1 

II                II                ill      i L_l L_ 

THE  FIRST  TRUST  AND  SAVINGS  BANK  OF  CANTON 

1                      1          ~ — 1 L_ 

NAME  OF  ACCOUNT 

« 

1 

1 

1 L 

COMPARISON  OF  STATEMENTS                                                ^" 

ASSETS 

\ 

i              §       v 

^*t; 

/^^ 

Cash 

! 

<    ) 

Notes  Receivable 

1 

Accounts  Receivable 

^ 

Notes  and  Accts.  Rec.  Due  from  Partners  or  Officers 

i 

Merchandise  Finished 

1 

Merchandise  Unfinished 

9 

Raw  Material 

1 

^._ 

Real  Estate  and  Buildings 

' — i 

Equipment 

1 

it 

1 

TOTAL 

L^'  — --   ^=S 

1 

I 

LIABILITIES 

h^ r- 

1 

Notes  Payable  ^Banks) 

I 

Other  Notes  Payable 

II           IB 

— 1 

Notes  Payable  (Partners  or  umcers) 
Open  Accounts 

1 

Labor  or  Salaries  Accounts 

— 1 

Deposits  of  Moneys  with  Us 
Mortgage  or  Liens  on  Real  Estate 

1 

Chattel  Mortgages 

1 

TOTAL  LIABILITIES 

5 

j 

Reserves  and  Depreciation 

Capital  (Preferred  Stock) 

Capital  (Common  Stock) 

Surplus  and  Undivided  Profits 

— i 

Net  Worth  (If  Firm) 

TOTAL 

-I— 

TOTAL  QUICK  ASSETS 

LIABILITIES 

J 

ii 

-^r\ 

Contingent  Liabilities 
Sales 

^ 

■"" 

\J" 

Net  Earnings 

Dividends  or  Withdrawals 

Charged  Off 

Added  to  Surplus 

TOTAL 

1 



— — \ 







= 

-■ 

== 

:  



Insert  I :  This  complete  record  furnishes  competent  '  'first  aid  " 
to  the  credit  department  of  an  Ohio  bank.  On  one  side  the 
customer's  financial  statements  covering  a  period  of  seven  years 
may  be  recorded  so  that  a  valuable  running  history  of  the  ac- 


count is  readily  available.  At  the  bottom  miscellaneous  items 
can  be  given.  On  the  other  side  the  maximum  and  minimum 
deposit  balances  and  loans  over  several  years  may  be  recorded, 
the  yearly  average  at  the  left  makes  a  quick  reference  column 


for  any  officer  desirous  of  finding  information  about  any  account. 
While  a  record  of  this  size  may  not  always  be  required,  yet  it. 
pays  in  this  bank,  because  it  cuts  out  all  guesswork  and  affords 
comparative  figures  which  permit  an  analysis  of  a  firm's  business. 


LINING  UP  THE  WORK 


17 


I 


then  transferred  to  cards  (Figure  9).  As  will  be 
apparent  one  form  is  for  individual  accounts  and  the 
other  for  banks  which  have  money  on  deposit. 

On  one  side  of  these  cards  appears  general  informa- 
tion concerning  the  account  and  on  the  reverse  side 
the  average  balance  from  month  to  month.  When 
these  averages  are  finished,  they  are  sent  to  the 
credit  department,  to  complete  its  file  of  all  the  neces- 
sary information  concerning  accounts. 

Of  course,  to  make  this  information  entirely  prac- 
ticable the  credit  manager  adds  his  own  analysis  of 
the  customer  and  makes  any  recommendation  or 
coniment  he  deems  wise.  Instances  came  to  light, 
during  the  investigation,  of  exhaustive  analyses  of 
risks  by  the  credit  department.  Some  of  them  prob- 
ably saved  various  banks  from  unfortunate  losses 
because  the  applications  looked  favorable  and  would 
probably  have  been  passed  by  the  discount  committee. 
The  expense  involved  more  than  paid. 

Different  banks  have  different  auxiliary  records  for 
giving  "first  aid"  to  then*  credit  department.  For 
instance,  the  First  Trust  and  Savings  Bank  of  Canton, 
Ohio,  finds  a  smnmary  of  statements  (Insert  I) 
helpful  in  keeping  tab  on  the  condition  of  any  customer. 
It  provides  for  annual  figures  covering  a  period  of 
seven  years.  The  reverse  of  the  sheet  gives  the  maxi- 
mum and  minimum  balances  and  loans  for  seven 
years.  This  arrangement  has  proved  especially  valu- 
able by  contrasting  the  relative  size  of  balances  and 
loans  for  analysis  at  a  glance.  Records  of  this  sort  are 
doubly  effective  in  keeping  track  of  commercial 
accounts.  They  show  the  value  of  each  account  and 
also  give  a  history  of  what  it  has  meant  to  the  loan 
department  of  the  bank. 

In  order  to  get  statements  in  from  customers 
promptly,  another  Ohio  bank  has  an  alphabetical 
card  record  of  dates  showing  when  statements  are 


UNION  COMMERCE 
^National  'Banl^ 


OF  CLEVELAND 


Dear  Sir: 

In  the  annual  revision  of  our  credit  files, 
we  find  that  the  last  financial  statement  of  your 
company  showed  its  condition  at  December  31.  1917. 
This  statement  further  shows  that  you  regularly  close 
your  books  on  December  31  of  each  year.  We  assume, 
therefore,  that  you  have  completed  another  fiscal 
year,  and  we  are  accordingly  enclosing  our  regular 
Clearing  House  form  with  request  that  you  furnish  ua 
statement  as  shown  at  the  last  closing  of  your  books. 

The  regulations  of  the  Federal  Reserve  Act 
require  that  in  order  to  render  paper  discounted  by 
National  Banks  eligible  for  rediscount,  the  discount- 
ing bank  must  secure  financial  statements  at  least 
once  each  year.  We  ask.  therefore,  that  as  soon  as 
your  annual  statement  is  available,  you  give  us  the 
information  sought,  answering  the  different 
questionnaires  whenever  possible. 

To  comply  with  the  Federal  Reserve  Act.  it 
la  very  necessary  that  we  be  supplied  with  the  profit 
and  loss  statement,  and  reconcilement  of  surplus,  set 
forth  in  page  2  of  our  blank. 


Very  truly  yours. 


itf 


Vice-President 


Figure  11:  Many  bankers  have  found  it  difficult  to  obtain  annual 
financial  statements  from  some  of  their  customers.  Here  is  a  letter 
that  has  effectively  overcome  this  "bugaboo"  for  one  bank.  Per- 
sonally signed,  it  accomplished  the  desired  results  in  many  instances. 

18 


I 


Copy  of  a  Resolution  Passed  by 

THE  CLEVELAND  CLEARING  HOUSE  ASSOCIATION 

At  a  Meeting  Held  on  August  4,  1915 

Cleveland.  Ohio 


WHEREAS.  The  Federal  Reserve  Board  under  its  regulation '  'B."  in  order  to  readily 
determine  whether  paper  offered  by  its  member  banks  is  eligible  for  rediscount,  requires 
that  each  bank  maintain  a  file  containing  original  signed  statements  of  the  financial 
condition  of  borrowera,  or  true  certified  copien  thereof,  designating  where  the  original 
statement  is  on  file,  and  specifies  that  the  following  information  shall  be  contained  in 
these  statements: 

A—The  nature  of  the  business  or  occupation  of  the  borrower. 

B — If  an  individual,  information  as  to  his  indebtedness  and  his  financial 
re^MnsibiUty. 

C — If  a  firm  or  corporation,  a  balance  sheet  showing  quick  assets,  slow  assets. 
permanent  or  fixed  assets,  current  Uabilities  and  accounts,  short-term  loans,  long* 
term  loans,  capital  and  surplus. 

D — All  contingent  liabiUties  such  as  indorsements,  guarantees,  and  so  forth. 

E — Particulars  respecting  any  mortgage  debt  and  whether  there  is  any  lien 
on  current  assets. 

F — Such  other  information  as  may  be  necessary  to  determine  whether  the 
borrower  is  entitled  to  credit. 

WHEREAS.  The  Federal  Reserve  Bank  of  Cleveland  has  compiled  suggested  forms 
©f  financial  statements  to  be  required  from  each  of  the  difTerent  classes  of  borrowers, 
and  has  submitted  copies  of  these  to  each  member  bank,  with  the  recommendation  that 
the  establishment  of  the  necessary  credit  files  be  immediately  begun;  and 

WHEREAS,  a  compliance  with  these  requirements  not  only  is  necessary  in  order 
that  the  member  banks  may  avail  themselves  of  the  aid  offered  by  The  Federal  Reserve 
Bank  in  case  of  need,  but  is  recognized  and  regarded  as  fundamental  in  the  establishing 
and  maintaining  of  a  competent  department  of  credit,  in  connection  with  the  making 
and  handling  of  commercial  loans. 

THEREFORE.  BE  IT  RESOLVED,  by  The  Cleveland  Clearing  House  Association. 
that  its  bank  members  cooperate  to  the  fullest  extent  in  the  action  recommended  by 
The  Federal  Reserve  Bank,  and  that  to  this  end,  the  suggested  forms  of  financial  state- 
ment, or  forms  similar  thereto,  be  accepted  as  a  standard:  that  copies  be  filed  with  each 
commercial  borrower,  and  competent  statements  be  required  from  each,  and  that  in 
future  such  statemenU  be  required  periodically. 

FURTHER,  in  order  that  the  other  local  banks  and  trust  companies,  not  members 
of  The  Federal  Reserve  Bank,  may  be  enabled  to  avail  themselves,  as  far  as  possible, 
of  this  rediscount  privilege  through  their  correspondent  banks  who  are  members  of 
The  Federal  Reserve  Bank,  to  the  end  that  our  entire  business  community  may  be 
directly  benefited  in  time  of  need,  be  it 

FURTHER  RESOLVED  that  they  be  earnestly  requested  to  cooperate  in  this 
movement— to  adopt  the  suggested  forms  of  financial  statements  as  their  standard— 
to  file  copies  with  each  of  their  commercial  borrowers,  and  require  from  each  a  com- 
petent statement  periodically — and  to  so  arrange  their  files  that  the  eligibility  of  their 
line  of  commercial  paper  to  rediscount  by  their  correspondent  with  The  Federal  Reserve 
Bank  may  be  readily  determined. 


Figure  1 2 :  With  the  letter  which  a  Cleveland  bank  sends  to  customers 
urging  them  to  furnish  an  up-to-date  statement  of  their  financial 
condition,  goes  this  statement  emphasizing  the  value  of  keeping  the 
bank  informed  of  their  standing.    It  has  produced  satisfactory  results. 

19 


NAME                           ADDRESS                    R.  F.  D.  NO. 

Owns  Rents , 
Acres  Acres  ' 

3ox 

Check- Certlff- 
ing      cate 

Savings 

Xmas 

Savings 
Bank 

Paper 

Calen- 
dar 

WIFE 

2 

ft 

1 

CHILDREN 

(    ) 

DATE 

SPIRIT 

REMARKS 

i» 

V 

LINING  UP  THE  WORK 


21 


Figure  13:  Investigation  indicates  that  there  are  numerous  sources 
from  which  a  banker  may  gather  information  to  help  him  determine  a 
borrower's  credit.  A  number  of  them  are  shown  on  this  "new  busi- 
ness" card  record,  the  front  and  reverse  of  which  are  illustrated. 

20 


due  (Figure  10).  Some  concerns  close  their  books  in 
December,  some  in  January,  some  in  July,  and  so  on. 
Guide  tips  at  the  tops  of  the  cards  enable  the  credit 
manager  to  tell  what  month  he  should  expect  a  state- 
ment from  any  firm.  As  he  receives  each  one  he 
places  a  checkmark  under  the  year.  This  shows  just 
how  complete  a  record  the  bank  has  of  each  customer's 
business  figures. 

The  bank  in  addition  enters  on  the  card  the 
name  of  the  officer  of  the  customer  company,  to  whom 
requests  for  statements  are  to  be  sent.  This  is  a  time- 
saving  item  because  the  bank  has  the  assurance  that 
the  request  will  be  given  prompt  attention.  Should 
an  officer  of  the  bank  wish  any  additional  information 
at  any  time,  he  has  sunply  to  refer  to  the  company's 
card  and  get  in  touch  with  the  man  whose  name  is 
recorded  on  the  card. 

If  the  bank  fails  to  receive  an  annual  statement  after 
a  reasonable  length  of  time,  it  sends  out  a  reminder 
letter  (Figure  11)  which  coiu-teously  explains  why  a 
statement  is  necessary.  "This  letter  has  been  of 
great  assistance  to  us  in  keeping  our  files  up  to  date," 
says  the  credit  manager.  With  each  letter  he  sends  a 
copy  of  the  local  clearing  house  resolution  (Figure  12) 
covering  this  point.  The  resolution  has  been  instru- 
mental in  saving  time  on  inquiries. 

E.  D.  Patrick,  president  of  the  First  National  Bank, 
of  Marengo,  Illinois,  which  is  located  in  a  fanning 
community,  makes  it  a  point  to  get  out  among  the 
farmers,  not  only  to  secure  new  accounts  but  to  size 
up  credit  risks.  His  "new  business"  card  record  for 
each  farmer  customer  or  possible  depositor,  which  is 
reproduced  on  page  20  (Figure  13)  is  of  considerable 
value  in  making  decisions  on  loans.  It  serves  as  a 
very  convenient  check-up  on  what  a  present  borrower 
or  a  possible  later  customer  is  doing.  By  carefully 
keeping  this  record  and  referring  to  it  from  time  to 


<  ♦* 


fl' 


1,      tl 


22 


TESTED  CREDIT  METHODS 


time  the  credit  officer  is  enabled  to  gather  facts  that 
back  up  other  credit  information.  The  front  of  the 
card,  for  instance,  shows  how  many  acres  the  farmer 
owns  or  rents,  the  amount  of  any  certificates  or 
accounts  in  his  name,  and  so  on.  On  the  reverse 
the  banker  notes  the  results  of  each  call  as  he  passes 
through  the  country.  Under  "spirit^*  he  registers  the 
farmer's  outlook  on  his  business.  This  affords  a  fairly 
good  analysis  of  his  progress  and  mental  attitude. 

This  and  other  plans  to  be  described  in  following 
chapters  help  to  put  the  credit  work  on  a  desirable 
basis.  They  make  the  organization  more  perfect  and 
tend  to  minimize  credit  losses.  And  that  is  the  mission 
primarily  of  the  credit  department. 


CHAPTER  II 
SIMPLIFYING  THE  CREDIT  OFFICER'S  DUTIES 

A  CREDIT  manager  has  so  much  analytical  work 
to  do  in  sizing  up  all  the  facts  and  figures  of  a 
credit  risk  that  his  auxiliary  records  must  be 
immediately  available  at  all  times.  Only  by  simpli- 
fying his  duties  to  the  fullest  extent  can  he  handle  his 
problems  with  reasonable  safety  and  to  advantage. 
That  is  why  credit  men  in  progressive  banks  are  using 
every  time-saving  facility  possible  to  lighten  ^heir  work. 
In  other  words,  the  fact  that  there  is  a  credit  depart- 
ment may  not  mean  a  high  standard  of  organization 
unless  the  credit  man  is  surrounded  by  competent 
help,  systematic  recording  devices,  and  any  other 
means  which  will  enable  him  to  give  his  attention  to 
the  real  facts  behind  the  depositor's  statements  that 
come  to  him.  For,  after  all,  it  is  the  man  behind  the 
figures  that  the  credit  head  has  to  consider  always. 

It  is  necessary,  therefore,  to  have  the  facts  in 
easily  usable  form.  As  stated  in  the  previous  chapter 
it  matters  not  whether  the  bank  is  large  or  small. 
In  a  small  bank  where  help  is  limited,  it  is  all  the  more 
essential  to  save  the  tune  of  the  officer  who  acts  as 
the  credit  manager,  for  he  is  burdened  with  the 
responsibiUty  of  acting  as  a  clearing  house  for  credit 
information  secured  from  many  sources.  To  him  the 
other  officers  look  for  credit  analyses  of  all  customers 
and  for  every  fact  regarding  borrowers.  It  is  up  to 
hun  to  have  a  system  of  operation  that  will  permit  of 
quick  reference  and  quick  conclusions. 

23 


il   I 


24 


TESTED  CREDIT  METHODS 


Capable  clerical  help  should  be  selected  to  give  the 
proper  assistance  in  keeping  accurate  records.  A 
mistake  in  figures  or  an  inaccurate  notation  on  any 
record  card  or  in  any  offering  book  might  mean  the 
loss  to  the  bank  of  thousands  of  dollars.  Like  the 
retail  store  which  offends  and  perhaps  loses  a  customer 
by  sending  out  goods  '^c.  o.  d.''  when  they  should  have 
been  charged,  one  error  of  the  credit  manager  may 
mean  a  disgruntled  depositor  or  a  customer  lost. 

From  this  standpoint  a  large  bank  has  even  a  bigger 
problem  than  its  smaller  neighbor,  because  it  is 
necessary  to  train  perhaps  a  hundred  helpers  in  con- 
trast to  a  possible  two  or  three.  The  credit  man  in  a 
small  bank  is  closer  to  his  conmiunity.  He  knows 
many  of  his  borrowers  in  a  personal  and  social  way. 
Therefore,  it  is  not  so  difiicult  to  keep  tab  on  the 
correctness  of  his  records.  On  the  other  hand,  he  has 
to  guard,  for  that  very  reason,  against  carelessly 
allowing  his  records  to  fall  below  the  required  standard 
of  safety,  or  to  be  neglected  altogether.  Likewise  he 
has  to  be  careful  that  he  does  not  allow  personal 
friendship  to  sway  his  judgment.  Even  if  the  bank 
plaj^  safe  for  awhile,  its  future  is  at  stake,  and  the 
credit  officer  of  a  bank  who  fails  to  have  adequate 
records  of  his  borrowing  customers,  especially  those 
who  are  getting  acconunodation  on  unseciu-ed  paper, 
may  be  doing  his  institution  a  great  injustice.  For 
instance,  in  the  event  of  his  death  it  might  be  impos- 
sible to  get  any  practicable  or  satisfactory  Hne  on  what 
credit  customers  are  entitled  to  without  laboriously 
going  through  all  of  the  transactions  of  the  loans  and 
discounts  department  for  several  years. 

Investigation  shows  that  in  some  banks  the  work 
of  the  credit  department  is  often  organized  into 
definite  divisions — certain  of  the  employees  do  nothing 
but  file  documents  and  papers,  others  handle  all  the 
indexing,  while  others  do  all  the  investigating.    This 


|r1 


Name 

LINE  OF  CREDIT 

Address 

Business 

Account  Opened                   Introduction 

Year 

Average 
Balance 

Date 

Maximum 
Loan 

Date  of  Last 
Statement 

Capital  and 
Surplus 

Quick 
Assets 

Current 
Liabilities 

Agency 
Report 

Figure  14:  This  compact  card  record  used  by  an  eastern  trust  com- 
pany is  valuable  for  keeping  track  of  loans  involving  large  amoimts, 
as  it  provides  for  yearly  comparisons  of  the  customer's  condition. 


■n 


^c 


mi 


•m 


ski^ 


^ 


isr 


4  9k. 


TXi 


S 


± 


^h 


'm 


^^ 


Figure  16:  This  form  is  of  great  service  to  one  bank  in  keeping  the 
proper  balance  on  loans.  All  loans  made  or  paid  are  entered  under 
the  columns  "in"  or  "paid."     The  amounts  paid  are  entered  in  red. 

26 


li 


ill 


il 


I 


«»  tto  UNION  mJST  COHPANT. 
ROCHESTOt.  N. 


T. 


I  tertby  certify  that  th«  f6Uo»lnf  i.  •  tn*  and  correct  copy  of 

fMOlutlons  duly  adopted  at  a  aMtlnc  of  tbo  Board  of  Olroetora  of. 

■■         ■  hold  at 


-Rocheator.  N.  r..  oa  tho- 


■jday  of. 


-.19   •  quorua  tboo  bolng  prosont: 


th.  deooalS^)!^f  JJf*  r***  ""^"  I™**  ^'''^'^^  "'  Rochester  be  named  one  of 
Vf  depositaries  of  this  Coapany  and  that  funds  so  deposited  be  -ithdr««,  «ni« 
upon  the  Check,  draft,  note  or  order  of  the  Coapany  signed  by  thrp^sJ^n?;; 

IS'JS.^LrST  »^«;j»^—»  »>»-•  »>••«  <luly  certified  to' the  uJion  Trist  CoiUj 
Md  the  said  Trust  Coapany  is  hereby  authorized  to  pay  such  checks  drafts 
note,  or  orders,  and  also  to  receive  the  saae  for  tS.  credit  of  o?' in  Jl»e„t 
troa  the  payee  or  any  other  holder  when  so  signed,  without  inquiry  as  fo^h« 

Ji'irJ^Hrf."'/'''"  '*^'  "  '"'•  disposition  Of  their  proceeds  eheth.J  drawn 
ISa^^f  «f il  fl!!^  ord^of.  or  tendered  in  payent  of  Individual  obliJIuon^T 
lb*  Officers  above  naMd.  or  othar  officer,  of  this  Coapany  or  otherwlaa 

af  and  .hJf?°!:!°*'  ""'^  V"'  President  or  Treasurer  be  and  they  respectively 
^   SL^oi  *J!.T  "**  »'"""•'•  authorized  to  effect  loan,  Ld  aSvancw  at 
•ay  tlae  for  this  Coapany  froa  the  Union  Trust  Coapany  of  Rochester  K  Y 

SLI^;  lTr>."'T   '"'*  ""'"  Obligations  or  evidence  of  indebU^;s;oJ'thl. 
?r^«;t    t"°'*  *""  *"""  evidence  of  indebtedness  to  be  signed  by  the 
President  or  Treasurer,  and  as  security  for  the  payaent  of  any  and  all  loan, 
advances  Indebtedness  and  liabilities  of  this  cS^InJ  to  puSg"  h^JtS^t; 
SSr'birrr:;'/"K?"*  "'  '•"^•^  "^  "«*  allToJk.  sSourU  ercJJleJcUl 
ZTtla!  iild  h!"  nf'^r'  """"''  receivable,  clalas  or  (and)  other  properf"" 
I^hitw^  ♦  ^,J\*'  Coapany:  also  that  the  President  or  Treasurer  is 

J^JciS  iaJr  M?,'''  "''T'''   •'**'  *"•  ""  °"^°"  Trust  Coapany  any  and  ill 
fT!-?i   P*P«r.  bills  receivable,  accounts  receivable  and  other  instruaenta 
and  avidencas  of  debt  at  any  tlae  held  by  this  Coapany  and  to  tJit  i^T 
Indorst.  a«al(n.  transfer  aad  deliver  the  aaaa.  ^^ 

*K.  .  ^  RESOLVED,  That  all  loana.  discounts,  notes  and  advancea  heretofor* 
•nd  •uyuo.  held  by  .aid  bank  are  hereby  approved,  ratifiad  and  co!fir«d^ 


Secretary 


Ottad  at  Rochastar.  N.  T. 


..  19 


(Zapresa  vlih 
eorporata  stall 


Figure  15 :  In  order  that  there  may  be  no  misunderstanding  regarding 
the  authority  of  customer  officials  to  apply  for  credit,  sign  notes,  or 
draw  checks,  one  bank  furnishes  each  depositor  firm  with  a  form  of 
this  sort,  which  safeguards  the  bank  from  exceeding  its  authority. 

26 


BACKING  UP  THE  CREDIT  OFFICER         27 

definiteness  of  organization  is  of  great  assistance  to 
the  credit  manager.  The  responsibility  for  all  effort  is 
distinct  and  clearly  understood.  This  leaves  the  credit 
man  free  to  perform  his  executive  and  analytical  duties 
unhampered  by  worry  over  details.  This  applies  equally 
to  the  credit  officer  of  the  small  bank,  even  though  he 
may  perform  some  of  the  routine  work  himself.  The 
fact  that  he  has  strengthened  his  judgment  with 
records  simplifies  his  work  to  that  extent. 

SOMETIMES  A  CLASSIFICATION  LIKE  THIS  WILL  SIMPLIFY 
YOUR  WORK  AND  SHORT-CUT  ROUTINE 

One  bank  shortens  its  routine  still  further  by  placing 
all  the  paper  it  carries  in  two  distinct  classes,  the 
notes  of  its  own  customers  and  the  purchases  it  makes 
in  the  open  market.  Each  has  a  separate  file  so  that 
the  credit  manager  can  refer  to  any  borrower's  folder 
almost  instantly.  The  regular  customer  file  is  sub- 
divided by  guide  cards  to  cover  these  types  of  accom- 
modation: Time  loans;  demand  loans;  collateral 
loans;  real  estate;  and  farm  loans.  Classifying  the 
paper  thus  helps  to  simplify  the  credit  routine.  This 
subject  is  covered  more  fully  in  Chapter  IV. 

The  credit  manager  of  the  Union  Trust  Company 
of  Rochester,  New  York,  uses  a  card  5  by  8  inches  to 
record  all  the  principal  facts  regarding  a  loan  and  he 
finds  it  of  great  value  because  of  its  simplicity  and 
compactness  (Figure  14).  This  card  is  worth  detailed 
comment,  for  it  has  several  unusual  features.  Notice 
that  it  has  spaces  for  entering  the  amount  of  credit 
allowed  and  also  the  name  of  the  customer  who  intro- 
duced the  borrower.  Then,  in  convenient  order  are 
headings  to  show  not  only  the  average  balance  and  the 
maximum  loan,  but  also  the  date  of  the  last  statement, 
the  capital  and  surplus,  the  quick  assets  and  current 
liabilities,  and  the  agency  report  figures  for  general 
comparison  and  verification. 


If 


1 

5 

? 


I 


■,\ 


br 


28 


TESTED  CREDIT  METHODS 


If  collateral  has  been  carried  at  any  time  to  cover 
loans  to  the  customer,  a  note  of  it  has  been  made  on 
the  back  of  the  card.  This  list  of  collateral  is  often  an 
index  to  the  character  and  judgment  of  the  borrower 
and  gives  the  credit  man  a  quick  and  helpful  insight 
into  the  risk.  The  card  is  of  still  greater  value  because 
it  shows  not  only  the  amount  of  straight  conmiercial 
loans  carried,  but  the  indorsed  paper,  if  any,  as  well. 
For  example,  all  straight  notes  are  represented  by 
black  figures  on  the  lines  of  the  form  under  '*  maximum 
loan,"  while  the  indorsed  paper  is  designated  by  red 
figures  in  the  half  space  just  above  the  black.  Ordi- 
narily this  comprehensive  record  is  kept  only  for  loans 
of  over  $500,  as  loans  to  individuals  under  that  amount, 
in  the  opinion  of  the  bank's  officers,  do  not  require  so 
much  clerical  attention. 

Another  plan  that  simplifies  the  work  of  the  credit 
manager  in  this  bank  is  that  of  getting  each  firm  or 
corporation  to  legalize  the  handling  of  its  deposit. 
Often  the  bank  accepts  an  account,  registers  the  names 
of  those  entitled  to  sign  checks,  and  lets  it  go  at  that. 
But  this  has  proved  to  be  unwise  especially  where  any 
legal  question  arises  regarding  the  authority  of  company 
officers  to  disburse  funds.  To  settle  all  uncertainty, 
the  Rochester  bank  has  had  typewritten  copies  pre- 
pared of  a  resolution  (Figure  15)  covering  this  point, 
and  the  credit  manager  hands  them  to  new  and  old 
depositors  to  be  filled  in  and  returned.  Gradually  a 
signed  resolution  is  coming  into  the  credit  files  for  each 
customer,  thus  safeguarding  the  bank's  interests  as 
well  as  the  customer's. 

The  credit  manager  has  a  definite  understanding  of 
his  authority  and  responsibility.  His  judgment  goes 
on  small  loans  except  when  some  unusual  condition 
or  emergency  arises.  Applications  for  new  loans  or 
for  increased  lines  of  credit  of  over  $1,000,  however, 
go  the  discount  committee  for  its  approval.    A  type- 


' 


BACKING  UP  THE  CREDIT  OFFICER         29 

written  report  covers  the  details  so  that  the  credit 
manager  easily  takes  care  of  the  routine.  In  order 
to  keep  the  work  from  getting  behind,  the  conmiittee 
meets  at  least  once  a  week.  It  is  composed  of  six 
directors  so  that  a  quorum  of  four  can  usually  be 
depended  on  to  be  present.  The  bank  finds  this  a 
better  plan  rather  than  to  have  a  committee  of  only 
three  directors,  who  might  not  always  be  able  to  attend. 
The  chairman  of  this  committee  rotates  at  each 
meeting  so  that  the  freest  discussion  is  encouraged. 
An  arrangement  like  this  gives  the  credit  manager  the 
cooperation  that  really  assists  him  in  clearing  away 
his  work  promptly. 

A  BANK  HAVING  A  CONSIDERABLE  VOLUME  OP  CREDIT 
WOEK  WOULD  PROBABLY  FIND  THIS  PLAN  HELPFUL 

In  some  banks  the  discount  committee  meets  every 
day  and  passes  on  practically  all  loans,  thus  making  it 
possible  for  the  credit  manager  to  dispose  of  his  ofifer- 
ings  each  day.  Where  the  amoimt  of  paper  handled 
is  large  this  is  considered  a  wise  plan.  Besides,  the 
chances  are  greater  for  satisfying  borrowers. 

Similarly,  progressive  banks  arrange  to  have  their 
discount  committees  pass  promptly  on  new  lines  of 
credit  or  changes  of  any  sort  in  them.  This  enables 
the  credit  manager  to  keep  his  records  up  to  the 
minute.  As  a  result,  if  a  borrower  wishes  accom- 
modation, the  credit  officer  can  immediately  recom- 
mend or  even  make  the  loan  without  referring  the 
appHcation  to  any  other  officer.  This  simplifies  the 
work  and  emphasizes  the  importance  of  having  every 
customer's  credit  clearly  defined  and  up  to  date. 
Customers  appreciate  progressive  treatment. 

Another  banker  uses  an  "in"  and  "out"  balance 
sheet  to  simphfy  further  his  records  so  that  he  may 
quickly  see  for  himself  and  for  the  discount  committee 
the  trend  of  credits.    This  balance  sheet  (Figure  16) 


J'!  I 

r  .1 


30 


TESTED  CREDIT  METHODS 


!       i 


has  the  two  headings,  "in"  written  in  black  and 
"paid"  written  in  red,  to  show  the  amount  of  loans 
made  and  the  amount  paid  each  day.  These  are  listed 
under  alphabetical  headings  to  make  the  work  as 
light  as  possible.  A  glance  at  this  record  indicates 
whether  the  bank  is  maintaining  the  proper  balance  in 
loans  and  points  to  future  decisions. 

The  credit  manager  of  a  western  bank  has  lessened 
the  routine  of  his  duties  by  devising  a  combination 
record  and  folder  for  each  depositor,  somewhat 
along  the  Imes  of  those  described  in  Chapter  I.  This 
folder  (Insert  II)  is  shown  open,  together  with  an 
illustration  of  the  front  page.  The  statement  sum- 
maries  are  entered  on  these  mside  covers.  All  other 
information  is  mserted  in  the  folder  and  the  complete 
record  is  filed  alphabetically  for  reference.  If  the 
customer  wants  a  loan,  the  credit  manager  makes  a 
note  of  it  and  turns  the  whole  folder  over  to  the 
discount  committee.  The  value  of  such  a  plan  is 
readily  apparent.  It  saves  time  in  recording  any  new 
statement  and  makes  the  whole  record  instantly 
available.  A  bank  in  the  Northwest,  which  keeps 
each  borrower's  record  in  a  folder,  enters  the  informa- 
tion  under  these  headings: 

1.  Statements 

2.  Information  from  other  banks 

3.  Answers  to  inquiries  from  other  eoimses  such  as 

suppliers 

4.  Agency  reports 

5.  Correspondence 

6.  Trade  leports 

The  credit  manager  can  thus  keep  each  folder  in 
order  and  easily  up  to  the  minute.  If  an  offering  is 
to  go  to  the  discount  committee  the  folder  is  ready. 
This  saves  confusion  and  makes  the  work  of  the 
credit  manager  less  difficult. 


m 


INSERT  II 


NAME                                                                                                              j               """KS                  -  — 

~|                           Fiscal  Year  Ends                              | — 

H                              I           M          .1                                    J _ -ii. 

TtTlF 

1 

1  1       II n — 1 — r 

jtcash 

Bills  Receivable 

annprcs                                                                                                                1 

" 

Accounts  ReceivaMt 

nil  uiic««  __^_^_— 

FOR  INFORMATION  REFl 

SOURCE  OF  STATEMEN 
nrcirrDC 

rp  TA                                       r 

^  Merchandise 
Raw  Material 

Cn    lU _____^ 1 

TS                                                        / 

- 

TOTAL  QUICK  ASSETS 

— ■ 

- 

Real  Estate ,  Buildings 
Machinery  and  Fixtures 

DIRECTORS - 

- 

— ■ 

- 

- 

TOTAL  SLOW  ASSETS 

TOTAL  ASSETS                                             K 
Bills  Payabto                                                            | 

nmEDnmLB^ 

..■   3=1 

^ 

r- 

— 

Accounts  Payable 

TOTAL  QUICK  LIABIUTIES 

Bonds  or  Mortgage  Debt 
TOTAL  LIABILITIES 

Date  Sales    Bid    Ask< 

MA 

)d    Date 

RKET  ON  ST 

Sales    Bid 

OCK 

Asked    Date  Sales 

Bid    Asked 

-_^j.  j:  _  =2 

- 

RATIO  QUICK  ASSnS  TO  CURREKT  LIABILITIES 

^ 

EXCESS  OF  QUICK  ASSETS 

-j 

i  =  = 

NET  WORTH 

— -.!....                                                                            = 

Preferred  Stock                                                    IT 

_ 

Common  Stock                                                        11 

_. 

— 

Surplus                                                                   11 
Book  Value  Common  Stock                                     1 

r 

"~" 

Gross  Business 

- 

— 

uross  income 
Expenses 

^__ 

Net  inconw 

1 

_ 

— 

Dividends  Paid 

1 

■ 

_i  Dividends  Accumuated  but  Unpaid 

1 

II- 

— 

_ 

--J- 

-h" 

— 

Insert  II :  Here  is  an  effective  way  to  back  up  the  credit  officers. 
The  front  page  of  the  folder  provides  for  a  complete  summary 
of  all  information  about  an  account,  and  takes  care  of  the  essen- 
tial preliminary  facts  covering  a  borrower's  business,  including 


tne  names  of  the  officers  and  directors  and  the  current  quotations 
on  the  concern's  stock.  The  second  and  third  pages  provide  for 
financial  statement  summaries  for  six  years.  With  the  folder 
go  letters   and  other  data  of  interest  to  the  credit  manager. 


BACKING  UP  THE  CREDIT  OFFICER         31 

A  bank  in  the  West  has  found  that  its  clerks  and 
bookkeepers  make  valuable  assistants  for  the  credit 
manager  in  compiling  information,  especially  about 
newer  arrivals  in  the  conmiunity.     Each  employee 


jdiMbL 


Maker 


yiUNX. 


SEP.l 
Address 


Assumed  by 


Address 


Date  of  Loan 


Date  Due 


Loan  Number 


Interest  Due 


Rate 


THE  GUARDIAN  TRUST  AND  SAVINGS  BANK  OF  TOLEDO 


% 


Date 


Principal 


Payments 


Balance 


Interest 


Memoranda 


Figure  17:  An  Ohio  bank  finds  this  card  record  useful  for  keeping  track 
of  its  loans,  as  it  shows  the  important  facts  of  each  transaction.  The 
tabs  at  the  top,  for  the  months,  help  in  finding  maturity  dates  quickly. 

keeps  in  mind  any  news  or  facts  he  learns  regarding 
people  in  the  community  so  that  he  can  turn  them 
in  to  the  credit  officer,  whenever  called  upon  to  do  so. 
For  instance,  when  a  man  apphes  for  a  loan,  each 
employee  is  asked  to  fill  out  a  card  which  reads: 

Do  you  know  applicant  personally? 

By  reputation? 

What  do  you  estimate  to  be  his  net  worth? 

Is  he  attentive  to  business? 

Do  you  consider  the  moral  risk  good,  fair,  or  indifferent? 

As  an  auxiliary  member  of  this  bank^s  loan  committee,  how 

much  do  you  feel  justified  in  advising  us  to  lend? 
Additional  information  or  remarks. 


Ill 


il'f 


:* 


32  TESTED  CREDIT  METHODS 

When  the  cards  are  ready,   the  credit  department 

H^ift  ^k'""^-  ""^  *^"*  2^  "P''^"^^  ^^^^  serve  to 
clanfy  the  discount  committee's  judgment  of  the 

apphcation,  as  weU  as  to  strength^  the  credit 
manager  s  mformation.  The  cards  go  to  the  file  and 
occasionaUy  an  employee  will  be  able  to  add  addi- 
tional mformation  to  his  original  answers.  This 
aimhary  information  helps  the  credit  officer  to  detect 
misrepresentation  on  the  part  of  applicants,  who 
sometimes  unconsciously  exaggerate  their  resources 
m  then-  zeal  to  obtain  funds. 

A  Toledo  bank  has  a  loan  "tickler"  card  file 
(Figure  17)  which  is  valuable  to  the  credit  manager 
or  other  officers.  It  shows  the  condition  of  loans 
mstantly  and  thus  saves  tnne.  The  general  facts  of 
each  transaction  also  are  set  forth  completely  enough 
on  these  cards,  so  that  often  the  credit  manager  ha^ 
all  the  information  he  needs  for  making  a  decision 
TOthout  refernng  to  the  customer's  credit  folder. 
The  ta,bs  for  the  months  serve  to  indicate  the  approxi- 
mate date  of  maturity.  ^ 

Those  and  other  record  helps  described  in  this  book 
and  m  the  volume  on  loans  and  discounts  give  the 
credit  manager  the  necessary  assistance  to  shnplifv 
his  routme.  And  it  is,  admittedly,  important  for  him 
to  be  furnished  with  every  faciUty  for  perfecting  his 
work  The  hfe  of  the  bank  depends  largely  on  how 
well  he  looks  after  aU  of  the  credit  activities. 


CHAPTER  III 


WORKING  WITH  THE  DISCOUNT  COMMITTEE 


i  H 


I 


EVERY  ojEcer  of  our  bank  handles  credits  accord- 
ing to  the  lines  of  credit  previously  agreed 
upon  by  our  board  of  directors,  which  com- 
prises our  discount  committee/'  says  F.  F.  Tillotson, 
assistant  cashier  of  the  Dime  Savings  Bank  of  Detroit. 
"This  plan  gives  every  lending  officer  full  power  to 
make  loans  to  regular  depositors  without  consulting 
the  judgment  of  any  other  officer.  Chu*  records  are 
usually  so  complete  that  we  do  not  have  to  hold  up  a 
loan  until  the  directors  meet,  which  is  twice  a  week. 
''If  an  emergency  does  arise,  the  analysis  of  each 
customer  has  been  made  so  completely  that  each 
officer  in  most  instances  is  able  to  make  a  decision  as 
he  sees  fit.  His  judgment  is  often  final.  It  is  the 
credit  department's  analysis  of  borrowers  that  relieves 
the  directors  of  much  detail  work.  This  in  turn 
speeds  the  lending  routine  and  saves  time  and  money." 
The  experience  of  this  bank  is  true  of  others  in  which 
the  credit  department  makes  a  thorough,  exhaustive, 
and  searching  investigation  and  analysis  of  every 
depositor's  and  appHcant's  financial  standing  and 
capacity.  Lower-priced  help  thus  handles  details  and 
minimizes  the  duties  of  high-priced  officials  and 
members  of  the  discount  committee.  Concise  analysis, 
as  more  carefully  covered  in  Chapter  VI,  is  the  only 
safe  course  to  pursue  in  handling  loans.  Experience, 
bankers  have  found,  proves  the  fallacy  of  taking  any- 
thing for  granted  about  a  depositor. 

33 


I  «j 


34 


TESTED  CREDIT  METHODS 


A  Michigan  banker,  who  considered  his  own  judg- 
ment sufficient  to  guide  hun  m  making  loans,  one  day 
received  a  personal  plea  from  a  Hfelong  friend  for  a 
loan  of  $10,000. 

'*IVe  got  a  wonderful  opportunity  to  make  double 
the  amount  I  want  by  investing  in  some  western 
property,''  argued  the  appUcant,  who  was  himself  in 
the  banking  business  in  a  neighboring  village.  "It's 
positively  a  sure  thing.  We  can't  lose.  You're  safe 
absolutely  in  signing  the  note  with  me.  Doesn't 
$5,000  clear  gain  look  good  to  you.  Will!" 

^  The  banker  had  no  credit  organization.  He  judged 
his  friends  by  his  personal  relationship  with  them,  and 
carried  his  records  of  their  worth  in  his  head.  He  was 
flattered  by  the  *' friendship"  of  his  neighbor. 

''Yes,  John,  your  word  is  good.  You  can  have  the 
money  if  you  want  it." 

And  the  note  went  through.  But  the  borrower  never 
made  good.  The  bank  lost  every  penny  of  the  $10,000 
and  the  cashier  who  granted  the  credit,  of  course, 
eventually  had  to  make  up  the  loss. 

Contrast  this  with  what  probably  would  have 
happened  in  this  instance  had  the  bank  conducted  its 
credit  routine  on  a  definite  basis,  with  the  added 
safeguard  of  an  active  discoimt  committee.  The  bor- 
rower would  have  been  required  first  to  furnish  a 
statement.  Then*  he  would  have  been  asked  to  sub- 
mit to  an  investigation.  Later,  if  the  conditions  war- 
ranted, he  would  have  been  granted  a  fine  of  credit- 
not  on  personal  friendship,  but  on  exact  knowledge. 
The  actual  illustration  may  seem  exaggerated,  and 
yet,  notwithstanding  the  helpful  influence  of  the 
Federal  Reserve  regulations,  banks  today  in  some 
localities  lend  by  sunilar  methods.  Too  much  emphasis 
cannot  be  placed  on  the  necessity  of  analyzing  care- 
fully all  applications,  no  matter  whether  received  by  a 
large  or  a  small  bank.    Then  the  work  of  the  lending 


SPEEDING  UP  THE  DISCOUNTS 


35 


officers  and  of  the  discount  conamittee  will  be  more 
satisfactory.  This  does  not  mean,  of  course,  that  the 
borrower  is  to  suffer  embarrassment.  When  he  under- 
stands that  every  appHcant,  no  matter  how  long  he 
has  known  the  cashier  or  the  president,  must  fill  out 
the  same  kind  of  statement  and  furnish  just  the  same 
sort  of  information,  he  usually  sees  the  justice  of  the 
newer  rules  of  banking.  Smaller  banks  undoubtedly 
find  this  task  harder  because  of  the  personal  acquain- 
tanceship.   But  there  are  ways  to  "break  the  ice." 

ONE  PROGRESSIVE  BANKER  USES  A  PLAN  LIKE  THIS  TO  GET 
FINANCIAL  STATEMENTS  FROM  CUSTOMERS 

For  instance,  a  banker  in  the  Northwest,  whose 
customers  include  a  number  of  small  merchants  and 
farmers,  has  been  uniformly  successful  in  getting 
statements  and  information  for  the  discount  committee 
by  explaining  to  them  the  requirements  of  the  Federal 
Reserve  System.  He  shows  how  he  can  accommodate 
them  to  best  advantage  only  by  having  paper  that 
the  reserve  branch  will  accept  for  rediscount.  To 
impress  this  further  and  also  to  save  time,  he  has  the 
financial  statement  blanks  printed  in  duplicate.  Then 
he  asks  each  customer  to  fill  one  out,  explaining  that 
the  original  will  go  to  the  Federal  Reserve  branch, 
should  the  paper  of  this  borrower  be  rediscounted,  and 
the  duplicate  to  the  bank's  files.  Borrowers,  in  this 
way,  easily  fall  into  the  more  businesslike  way  of 
cooperating  with  the  bank,  and  the  credit  officer  has 
original  statements  to  file  with  the  Federal  Reserve 
branch  when  sending  paper  to  it  for  rediscount.  This 
plan  also  assures  the  discount  committee  of  more 
accurate  analyses  of  all  customers'  financial  condition. 

In  many  banks  complete  summarized  analyses  are 
all  the  more  necessary  because  the  volume  of  business 
may  not  seem  large  enough  to  warrant  daily  meetings 
of  the   discoimt  conamittee.     For  weekly   or  semi- 


i|t 


[fi 


36 


TESTED  CREDIT  METHODS 


;  1 


weekly  meetings  it  is  important  to  conserve  time. 
Therefore  the  credit  officer  whose  records  are  complete 
is  the  most  valuable  to  his  bank.  Doubly  so,  if  he 
makes  applicants  see  the  ** whys''  and  *' wherefores." 

"We  want  to  make  our  attitude  plain  no  matter 
whether  the  decision  is  favorable  or  unfavorable/' 
says  one  credit  manager.  *'In  fact,  we  beheve  it  pays 
in  the  long  run  to  be  painfully  frank  if  need  be.  We 
tell  our  customers  their  weak  points  even  though  it 
hurts  and  they  resent  it  for  a  time.  In  numerous 
cases,  however,  these  depositors  have  returned  to  us 
and  brought  us  more  profitable  and  more  desirable 
business  than  before.  They  have  gained  by  our  advice 
and  have  been  honest  enough  to  say  to  us:  *You 
were  right,  and  we've  profited  by  what  you  told  us 
even  though  we  didn't  want  to  hear  it.'" 

Classifying  credits  also  is  a  help  to  the  discount 
committee.  The  various  elements  of  risk  in  different 
lines  of  business — the  dangers  likely  to  accompany 
lending  to  this  or  that  concern— are  important  to 
consider,  and  offerings  arranged  and  classified  to  best 
advantage  are  much  easier  for  the  discount  com- 
mittee to  go  over  than  if  presented  without  regard  to 
any  classification.  Methods  which  have  proved  valu- 
able in  handling  this  phase  of  credits  are  described 
more  fully  in  Chapter  IV. 

Beyond  these  points  the  discount  committee  always 
naturally  wants  to  have  its  work  safeguarded  to 
reduce  chances  of  loss  to  a  negligible  minimum.  Of 
course,  exhaustive  investigation  of  every  business 
helps  to  make  commercial  loans  safe,  and  Chapter  VIII 
goes  into  this  subject  in  detail.  Thorough  investiga- 
tion, together  with  careful  regard  for  all  other  details, 
makes  the  possibility  of  unfortunate  decisions  rarer 
than  otherwise  would  be  the  case. 

Auxiliary  reports  of  credit  agencies  and  similar 
information  give  the  committee  an  additional  basis  to 


SPEEDING  UP  THE  DISCOUNTS 


37 


i 


work  on  in  guarding  against  extending  credit  to  risks 
that  look  good  on  their  face  but  show  unexpected 
weak  spots  after  the  facts  from  every  source  have  been 
carefully  gone  over.  Often  commercial  loans  to  cus- 
tomers represent  about  60%  of  the  total  loans,  so  it  is 
important  and  essential  to  know  that  every  one  of 
these  loans  is  soimd. 

Commercial  paper  may  represent  20%  of  the  total 
loans  outstanding,  so  that  every  fact  regarding  the 
responsibility  back  of  it  must  also  be  learned  during 
the  10-day  option  on  purchases  usually  given  by  note 
brokers.  The  credit  department  narrows  the  discount 
committee's  work  by  having  this  information  just  as 
complete  as  it  is  possible  to  get  it.  The  offerings 
should  include  reports  from  the  maker's  bank,  from 
business  houses  in  the  same  line,  from  mercantile 
agencies,  and  the  like.  These  sources  of  information 
are  not  necessarily  infallible,  as  bankers  know,  and  the 
only  safe  judgment  possible  for  a  committee  is  that 
arrived  at  by  having  several  sources,  in  order  to  check 
one  against  the  other.  Small  banks  need  these  checks 
just  as  much  as  large  banks  do. 

THIS  TENDENCY  SHOULD  BE  WATCHED  CLOSELY  BY 
EVERY  OFFICER  INTERESTED 

By  having  all  offerings  carefully  classified  the  com- 
mittee forestalls  one  great  danger  in  lending — that  of 
accepting  too  many  risks  of  the  same  kind.  Loans  in 
too  large  an  amount  should,  of  course,  never  be  made 
to  businesses  in  the  same  fine  of  selling,  manufactm*ing, 
or  distributing.  Otherwise  a  slump  in  that  one  market 
might  lead  to  grave  dangers. 

It  is  needless  perhaps  to  warn  against  lending  to 
oneself  in  banking.  Yet,  even  today  investigation 
indicates  a  tendency  for  banks  to  lend  to  themselves 
in  roundabout  ways.  Perhaps  the  committee  makes 
a  loan  to  a  stockholder  who  in  turn  lends  it  back  to 


i  ,1 


( 1 


I 


38 


TESTED  CREDIT  METHODS 


the  bank.  All  this  temptation  to  take  chances  by 
devious  ways  is  eschewed  by  progressive  banks.  One 
investigation  disclosed  the  fact  that  *' self-loans" 
caused  214  out  of  418  bank  failures. 

Some  credit  departments  make  it  easier  for  their 
discount  committees  by  ''coding"  their  reports  in 
various  ways.  For  instance,  an  Ohio  credit  manager 
puts  a  red  tab  on  the  edge  of  all  offering  books  contain- 
ing what  he  considers  unfavorable  risks.  Favorable 
offerings  have  a  blue  tab  to  distinguish  them,  while 
applications  on  which  he  gives  no  reconmiendation  are 
unmarked.  This  makes  it  easy  for  the  committee  to 
size  up  the  work  for  each  session.  Some  banks  use 
red  paper  for  unfavorable  reports  of  any  sort  regarding 
a  borrower.  Other  methods  of  a  similar  nature  save 
credit  officers  the  time  and  inconvenience  of  going 
through  a  mass  of  information. 

A  form  that  has  minimized  one  credit  committee's 
work  is  reproduced  in  Insert  III.  Both  the  back  and 
reverse  sides  are  arranged  for  entries.  The  card  is 
of  regular  letter-file  size  and  contains  spaces  for  com- 
parative statements  of  an  individual  or  firm  covering 
a  period  of  seven  years.  If  the  risk  is  a  firm  the 
information  includes  the  names  of  the  members  or 
partners.  The  record  shows  average  balances  at  the 
bottom,  and  all  information  concerning  loans  on  the 
reverse  side.  For  correspondent  bank  customers  a 
similar  card  (Insert  IV)  affords  a  worth-while  compact 
record  on  the  one  side. 

In  still  another  bank  all  of  the  window  officers  and 
tellers  comprise  a  ''conamittee  of  the  whole"  to  gather 
all  possible  information  regarding  customers  or  possible 
borrowers.  The  method  used  is  sunilar  to  that  of  the 
Iowa  bank  described  in  Chapter  I.  If  an  officer  hears 
a  customer  at  the  window  make  any  remark  that 
plight  be  of  value  to  the  discount  conmiittee  he  jots 
it  down  casually  on  a  tab  he  keeps  on  hand. 


INSERTS  III  AND  IV 


1^ 


NAME  OF  FIRM  OR  INDIVIDUAL 


0 


MEMBERS  OR  PARTNERS 


DATE  OF  STATEMENT 


Cash 


t  liM 


Accounts  Receivable 


(D 


LOANS 


Bills  Receivable 


Merchandise 


Raw  Material 


Jan. 


QUICK  ASSETS 


Feb. 


Real  Estate  and  so  forth 


Mar. 


1918 


1919 


As 
Maker 


Maximum 
Minimum 


Maximum 


Minimum 


Maximum 


As 
Indorser 


Paid 
Out 


As 
Maker 


As 
Indorser 


Buildings 


Apr. 


Machinery  and  Fixtures 


TOTAL  ASSETS 


May 


June 


Minimum 
Maximum  1 


Paid 
Out 


1920 


As 
Maker 


As 

Indorser 


Minimum 


Maximum 


Minimum 


Maximum 


liilu 


Minimum 


July 


Maximum 


Bills  Payable  (Merchandise) 


Bills  Payable  (Banks) 


Accounts  Payable 


CURRENT  LIABILITIES 


Mortgage  Loans 


TOTAL  LIABILITIES 


NET  WORTH 


CONTINGENT  LIABILITY 


ANNUAL  SALES 


RATIO 


Aug. 


Sept. 


Minimum 
Maximum 


Paid 
Out 


1921 


As 

Maker 


As 
Indorser 


Paid 
Out 


1922 


As 
Maker 


Minimum 


Maximum 


Minimum 


Oct.  -, 


[Maximum 


Nov. 


Dec. 


Minimum 


Maximum 


Minimum 


Maximum 


Minimum 


Agreed  Line 
of  Credit 


As 
Maker 


As 
Indorser 


As 

Indorser 


Date 


As    1     As 
Maker  I  Indorser 


Date 


ASSETS 

Loans  and  Discounts 


Overdrafts 


Real  Estate 

U.  S.  and  Other  Bonds 


Cash  and  Exchange 


Total 


_    Capital 


LIABILITIES 


As 


As 


Maker  Indorser 


Date 


Date 


I ndorsers  or  Guarantors 


Estimated  Worth 


1918 


1919 


1920 


Net  Worth 


Excess  Quick  Assets 


1921 


Ratio 


Surplus  and  Profits 


Deposits 


Bills  Payable 


Circulation 


Due  Federal  Reserve  Bank 


Rediscounts 


Total 


Average  Yearly  Balance 


1914 


1915 


1916 


1917 


_     1918 

1919 

1920 


1821 


1922 


1923 


AVERAGE  MONTHLY  BAUNCE 


Jan. 


Feb. 


Mar. 


Apr. 


May 


June 


Jui7 


Aug. 
Sept. 


Oct. 


Nov. 


Dec. 


1918 


1919 


1920 


1921 


1922 


LOANS 


correspondents: 


AVERAGE  BAUNCES 


1918 


1919 


1920 


1921 


1922 


1923 


Jan. 


Feb. 


Mar. 


Apr. 


May 


June 


July 


Aug. 


Sept. 


Oct. 


Nov. 


Dec 


Average 


L 


Jan. 


Feb. 


Mar. 


Apr. 


May 


Juno 


July 
Aug. 


Sept. 


Oct. 


Nov. 


Dec. 


Jan. 
Feb. 


Mar. 


Apr. 


June 


July 


Aug. 
Sept. 


1918 


Own 
Note 


End. 
Paper 


End.  or 
Coll. 


Paid 
Out 


1921 


Own 
Note 


Oct. 


Nov. 


Dec. 


End. 
Paper 


End.  or 
Coll. 


Paid 
Out 


1919 


Own 
Note 


End. 
Paper 


End  or 
Coll. 


Paid 
Out 


1900 


Own       Ei^      C«i4r 


1922 


Own 
Note 


End. 
Paper 


End  or 
Coil. 


Paid 
Out 


Own 


19Z3 


Inserts  III  and  IV:  A  practical  card  record  that  has  done  much  to  simplify  the  work  of 
one  discovmt  committee  is  illustrated  above.  These  cards  are  letter-file  size  so  that  they 
are  easy  to  find  and  handle.  Number  1  is  the  front  of  the  record  for  depositors  and  num- 
ber 3  is  for  correspondent  banks.    Just  as  in  some  of  the  other  records  described  in  this 


chapter,  number  1  has  spaces  for  entering  the  comparative  statements  of  a  borrower  over  provides  in  detail  for  a  record  of  maximum  and  minimum  loans  fcr  five 

an   extended   period.     Information,  such  as  contingent  liability,  annual  sales,  and  the  this  sort  furnish  ft  pretty  fair  barometer  of  a  business.    Number  3  is  somewhat  difiTerattia  its 

ratio  of  quick  assets  to  liabiliries,  is  added  at  the  bottom,  as  well  as  average  balances  by  make-up  to  meet  the  requirements  of  accounts  of  other  banks.     It  is  printed  oa 

months  covering  several  years.    Number  2  is  the  reverse  of  number  1.    Note  how  it  only.    Factsrecordedinthis  way,  you'll  agree,  make  credit  problems  much  easier  to 


SPEEDING  UP  THE  DISCOUNTS 


39 


For  instance,  a  farmer  while  cashing  a  check  may 
tell  of  some  new  cattle  he  intends  to  purchase  or  he 
may  announce  that  he  is  going  to  market  his  crop  in 
"a  couple  of  weeks."  All  this  information  may  be  of 
value  to  the  credit  department.  Perhaps  that  same 
day  the  farmer  applies  for  a  loan.  Does  his  applica- 
tion check  up  with  the  casual  information  he  has  given 
out?  It  is  surprising  how  much  help  these  wide-awake 
ofl&cers,  trained  to  be  on  the  alert  for  information  like 
a  newspaper  reporter,  give  the  discount  committee. 

Ideas  like  these  may  be  adapted  in  whole  or  in  part 
by  other  banks  desirous  of  improving  their  credit 
methods.  Or  the  plans  outUned  may  suggest  ways  to 
make  the  work  of  the  discount  committee  easier.  Thus 
the  committee  obviously  makes  its  services  more 
valuable  to  the  bank  while  still  transacting  the  work 
in  a  shorter  space  of  time. 


v. 


t. 


Il 


i 


\i  i 


CHAPTER  IV 
HOW  TO  CLASSIFY  THE  RISKS 

A  GRAND  RAPIDS  bank  has  a  personal  record 
file  for  all  of  its  borrowers  in  addition  to  a  classi- 
fied history  of  each.  The  two  sets  of  cards, 
alphabetically  arranged,  form  an  invaluable  basis  for 
indexing  the  records  of  the  credit  department,  for  the 
two  complement  each  other.  Consequently,  if  by  any 
chance,  a  card  should  be  misplaced  in  one  file,  suflScient 
information  may  be  found  on  the  other  card  of  the 
sanie  borrower  to  guide  the  lending  officer  in  his 
decision.  Thus  he  need  not  cause  the  customer  any 
imnecessary  delay. 

In  the  volume  on  loans  and  discounts  of  this  series 
is  described  in  detail  how  the  personal  file  operates  to 
help  the  credit  department  and  the  lending  officers. 
Other  banks  have  similar  records  and  handle  them  in 
various  ways  to  promote  effective  results.  One  bank 
in  the  Middle  West  classifies  the  cards  as  favorable 
or  unfavorable  by  putting  a  red  tab  on  all  the  cards 
that  contain  records  of  customers  who  would  probably 
make  unfavorable  risks.  These  danger  signals  are  of 
great  value  especially  at  particularly  busy  hours  of 
the  day.  When  an  applicant  applies  for  a  loan  and  the 
officer  has  his  doubts  about  the  risk  he  excuses  himself 
for  a  moment  and  takes  a  *'peep"  at  the  personal  file. 
If  he  finds  a  red  tab  on  this  customer's  card,  he  loses 
no  more  time  at  the  moment  but  promises  to  notify 
the  customer  as  soon  as  possible  if  it  is  within  the 
province  of  the  bank  to  lend  the  money. 

40 


s 

19 

*-*^ 

'IMWiTtfifml 

,^ 

Rn*  DttMBtt  S 

tfl^mr  Baiik  AdHduiito         _ ._ 

. .  ..  i.«t  Afrwin  fmn  w  t^ 

MMbwi 

%NMlN*:/frM                    ,.       ,      , 

llBUlTf 

TMMurrr 

1 

-. 

VfM 

1»7 

isn           H           itii           ] 

19»               1 

\m         1 

_»*•»»«. 

ap-o 

.   — 

.S"  '^ 

10  t 

— 

tw.A-A. 

•  TO 

— 

.  p*♦'^ 

1 

000 

. 

,  •••rMwlh. 

5"0C 

— 

.IMWtrti 

t50 

— 

,ttM 

5*00 

— 

■MTpWt 

|50 

— 

(MH 

a 

yf\ 

lU.M. 

Mm.Lm« 

KM&LaM 
MM.nn. 

liklM. 

Mm.  Mm. 

Mil.i.M< 

*i.M. 

■hLOta. 

«ta.OtM. 

«>.M. 

IMlOmc. 

<M..OIik 

A..M, 

MkMm.   Mi^OImI 

JM. 

L 

35 

«• 

L 

'• 

L 

L 

c — 

r 

b 

D 

a 

D 

D 

_Jb 

r«iu 

L 

ta 

1 

it 

L 

L 

L 

L 

b 

b 

p 

P 

P 

It 

L 

L 

t 

L 

L 

\. 

6 

10 

6 

6 

p 

0 

P 

& 

»m» 

L 

S 

L 

L 

L 

(. 

L 

P 

0 

D 

0 

0 

D 

M» 

I 

is 

>-5o 

. 

i-y* 

- 

L 

l 

L 

L 

0 

jD 

D 

D 

6 

0 

hm. 

L 

le 

Lro 

-'tf. 

. 

L 

L 

L 

L 

6 

0 

0 

P 

b 

<> 

M» 

C 

5 

Lh 

- 

L     t 

- 

L 

L 

L 

L 

D 

6 

b 

b 

B 

5 

P 

ta» 

L 

)s 

•■  f  ♦ 

L« 

. 

L 

L 

L 

L 

D 

pi*v 

0|M 

D 

D 

0 

0 

U0L 

L 

L 

L 

L 

V 

ir- 

'" 

0 

D 

D 

0 

6 

0" 

(M 

L 

L 

L 

L 

L 

L 

P 

P 

b 

b 

D 

b 

N«. 

L 

L 

L 

L 

L 

L- 

tl 

P 

6 

P 

If- 

£f 

■ 

?*j.x 

L 

t 

I 

i. 

1, 

■ 

I 

f— 

u 

0 

6 

6 

0 

0 

D 

0 

Q 

h.  fS  *«rf 

. 

_ 

Lj 

^^^, 

^^ 

^^^^ 

^^ 

^^ 

-L__ 

4, 

I 


;  I 


Figure  18:  This  card  (front  and  reverse)  enables  the  credit  depart- 
ment of  an  Ohio  bank  to  keep  a  complete  record  of  each  customer, 
classified  by  number  according  to  the  type  of  business.  Thus  "No.  8** 
at  the  top  of  a  card  identifies  it  with  that  particular  business  division. 

41 


CLEVELAND  CLEARING  HOUSE  ASSOCIATION  FORM 

•TATIMMT 


mOIVIINUL 


TO  UNION  COMMERCE  NATIONAL  BANK,  aEVEUNO.  OHIO 

voa  THB  ruRPon  or  procvrino  ckbdit  fkom  timk  to  timb  with  you,  mm  mt  NBoortAM.B  rAPBB  Oil  omui- 

I  rVKIfiaaiTMBrOLLOWtNOAaATBUBANDCOKBBCT    STATBMBNTOr    MY  riMANCIAI.  COMOITION  ON  It 

IBMBBY  AOKBB  TO  HOTirV  TOO  IMMBDIATBLY  IN  WRITIMO.  OF  ANY  MATBKIAU.V  UNrAVOHABLE  CHANOB  IN 
MY  ttMANCIAL  CONDITION.  IN  THB  AMBNCB  OP  SUCH  NOTICB  OH  A  NBW  AND  rUU.  WRITTEN  tTATBMKNT.  THIS 
n  TO  BB  CONSIDCRBD  AS  A  CONTINUINO  STATBMBNT.  AND  THAT  IfY  PBCUNIAIIY  BBWONStBIUTY  MA*  NOT  PAtXBH 
aCtOW  THB  CONDITION  HBKBIN  UT  POKTM. 

(la  tk«  itmn  af  aaj  tmmuu,  Immtt  ttphtn  la  tuumntt  Hhss.  knwmm  •»  < 

•V  mm  uuM  Ik*  «iMMiM*  cwncilir.     Ittm  M  kattMi  odowtk  m«*  I 


r  Ikt  w—4»  "Ym,"  "Ma'*  m 


( 


ASSETS 

CBMTS 

UABILITieS 

DOLLARS 

CXWti 

CASH  OK  HAND  AND  IN  BANK 

SBCintlTV 

ACCOUNTS  DUB  MB-OOOD 

NOTBS  OWBO  BV  MB-WITM  SBCURITY 
OTNBR  THAN  RIAL  KSTATS 

UMBCURBO  LOANS  DUB  MB-OOOO 

MOTSS  OR  MORTOAOBS  OWBO  BY  MB-i 

SKOmO  LOAMS  DUB  MB 

NOTES  OWED  BY   MS-WITN  CHATTXL 
MORTGAGE  AS  SBCURITY 

MORTaAOB  UMNS  DUB  MB 

ACCOUNTS  OWED  BY  MB 

PAKU  PRODUCTS  ON  HAND 

ITBMIZB  ANT  OTHBR  INDRBTBDNBSS 

LAND 

■UILDINOa 

PARM  IMPLBMBNTS  AND 
MACHINBRV' 

iNVBSTMBNTS-ltBMUB 

TOTAL  LIABILITIES 

NET  WORTH 

TOT  At 

TOTAL 

CONTINQENT  UASILITY  OF  ANY  KINO 


ON  NOTBS  OP  OTKBAS  INDORSSD  by  MB 


AS  OUARANTOR  POR  ACCOUNTS  AND  NOTBS  OP  OTWBRS 
ON  NOTBB  BXCMANOBD  WITH  OTHERS 


AS  BONDSMAN  OR  SBCURITY  POR  OTHBRB 
POR  LBASBS 


OTHBR  THAW  ABOVE  SPECIPIBO 


Um  AND  RltLOtnOS-                 0«TAaS  RCLATIVC  TO  ASSETS  AND  LiAMLITICS 

Tab  la  WkM*  Naa> 

Aa.Mi«VJ— 

Raauk  MkUiH  Dunn* 
LMPanlYMT 

» 

S 

* 

« 

* 

ATPRAISBOI. 


VAJBB  RAIOjra.WIIAT  OATB». 


Figure  19:  Not  only  do  the  financial-statement  forms  shown  here 
and  on  succeeding  pages  illustrate  an  important  method  of  classifying 
credits  according  to  individuals,  partnerships,  and  corporations,  as  out- 
lined on  page  54,  but  they  also  indicate  how  thoroughly  some  banks 

42 


t 


lAinrotMBRi 


I  IMIBRBSTBO  nt  VOOM 


BITIBII  «•  BPCCIAI.  OK  UMmO  rAKTMB**. 


r  A  nkBTMSB  m  *inr  mau. 


^mrtaum  any  juooMBim  uNaATtBrBa.oii  aiim  pbnodio  aoaimbt  voo  and  pom  what  Aitouirr* . 


!■  vou*  utm  msuRBor. 


^Aa«OIIT». 


lARYr. 


fUVm  TOO  AMY  LBAaaMOLas  NOT  MBNTIONBO  M  VOVR  AaSS1B>_ 
|M«BO«TAIUI  - 


«aAT  M  veim  opimion  a  tub  mbt  woktm  op  bacn  wooub*  cm  voob  Nona». 


^■B  AMY  or  VOUB  ASBBTB.  OTMBB  TMAM  BBAL  BBTATB. 


IC«POBI>  OB  HYVOTHBCATBO  Of  AMY  WAVf  . 


NOTES  OWED  lY  ME: 

TaWkMOIwa 

»■■■«« 

DaM 

WIhbOm 

latvaNBaW 

« 

AOOOUNTS  OWCD  IV  ME: 

,.w^ 

A— 

«.o. 

^m^ 

• 

UVE  STOCK  ON  HAND 

rANMI«0OUCT.«NMANO 

N.S.WIM 

YMm 

D.i.«,«» 

«.-ii» 

««. 

• 

• 

I 


gather  credit  information  and  how  they  classify  it.  For  instance,  on 
these  two  pages  are  the  points  that  a  bank  wants  to  know  about  an 
individual  borrower — say  a  farmer.  Aside  from  the  usual  items,  the  state* 
meat  calls  for  facts  regarding  real  estate,  farm  equipment  and  so  on* 

43 


i 


« 


ttS 


TESTED  CREDIT  METHODS 


It  is  readily  apparent  how  much  time  and  anxiety 
the  red  tabs  save,  especially  under  stress.  Such  a 
classification  minimizes  unnecessary  delays  during 
banking  hours.  It  also  enables  the  lending  officer  to 
appraise  the  borrower's  worth  quickly,  without  em- 
barrassment. When  the  busy  part  of  the  day  is  over 
the  apphcation  may  again  be  taken  up  and  the  reasons 
for  the  imfavorable  record  gone  over  carefully  to  see 
whether  it  would  be  wise  to  grant  the  customer  any 
credit  at  the  present  time. 

The  file  also  has  a  number  of  other  time-saving 
subdivisions  to  enable  the  officers  to  find  a  card  quickly. 
For  instance,  the  names  of  doctors  and  lawyers  are  in 
one  section,  of  manufacturers  in  another,  of  school 
teachers  in  another,  of  retail  merchants  in  still  another, 
and  so  on  through  to  miscellaneous  occupations. 

Besides  this  personal  file,  almost  every  bank  has 
some  sort  of  classified  history  of  all  risks.  Sometimes 
this  history  is  in  folders  alphabetically  arranged  and 
sometimes  on  cards,  while  often  banks  maintain  both 
records.  The  card  classification  of  one  bank,  which 
supplements  the  personal  file  outlined  at  the  beginning 
of  the  chapter,  has  proved  most  effective.  Figure  18 
shows  the  make-up  of  the  cards,  both  front  and 
reverse.  They  are  5  by  8  inches  in  size.  Their  arrange- 
ment is  somewhat  different  from  that  often  seen  on 
cards,  and  for  this  reason  it  may  offer  valuable  sugges- 
tions for  keeping  tab  on  borrowers. 

Notice  that  the  information  called  for  includes  the 
amount  of  the  first  deposit,  the  names  of  the  chief 
oj05cers,  and  a  list  of  other  bank  accounts,  if  any. 
Plenty  of  room  is  reserved  for  remarks. 

The  reverse  of  the  card  contains  spaces  for  entering 
brief  comparative  figures  of  the  business  for  five  years. 
It  also  includes  columns  for  the  average  balances  by 
months  and  the  maximum  and  minimiun  loan  and 
discount  by  months  for  the  five  years.     The  cards 


tnTUiaiT    CLEVELAND  CLEARING  HOUSE  ASSOCIATION  FORM      momouM. 

HAMurAcnnuMo  or  macAiRiLB  ■ 


wotonm 


MAiMomcs 


UKATION  or  PLAHT 


WXAMCtOM 


TO  UMIOM  COMMERCE  NATIONAL  BANK,  CLEVEUND,  OHIO 


Pomrmtrumrom»r»ocmtm>cm*Bnn<MrmmTOTmmwt^Hy<)u.w<»i£YHtaafTiABLMru%noKOTtmm^ 
f»>om>wn«o  A»AT»WKAiiocoia«cTttAT««i«WT  or  tn  yniAWCiAL  cowditiok  ok  i»-.,^.Ain>  Hxmmmt  mibib 

TO  IK»rir»   TOO   UO<BI>UTmt.V  WtnUtlHO.  or  Airr  MATUIAIXV  UMTAVOBABLm  chance  W  my  riMANCUL  CONOmON  nt  THS 

AMBMCS  Of  WOCM  HOTKX  0«  A  WW  AMD  rWU.  WWTTW  tT ATElttHT.  TH1«  M  TO  K  COII»ID«««0  AS  A  COIITII«UU«l*TATmMtJ«T 

AMD  T«AT  MY  ntCUNIAIIT  «»l«mSIBn.mf  HAa  MOT  VALLSN  BBLOW  THE  COKDITtOM  KKUIIt  SET  VOKTM. 
(I.  Qm  rti  -       tl  tmr  MM..I.  UMtt  ciplMft  I.  MM>iM.t  f.™*  Aa*mm  iB  «M«to«  <a  bOimia.  pMn-    Vm  tW  >«<i>-1 


M8ETS 

DOLLARS  1 

CENTS 

UABIUTIES 

DOLLARS  1 

CKNTS 

CASH  ON  HAND 

NOTES  PAYABLE  PO»  MEECHANOISE 

CASH  IN  BANK 

NOTES  PAYABLE  TO  BANKS 

NOTES  KECSIVABLE  OT  CUSTOMKKS- 
DUB  WITHIN  M  DAYS 

MOTES  PAYABLE  FOB  PAPEK  SOLO 

NOTES  RECEIVABLE  O*  CUSTOUEKS— 
DUE  BEYOND  M  DAYS 

MOTES  PAYABLE  TO  OTHERS 

ACCOUNTS  RECEIVABLE  OT  CUSTOMSBS 

ACCOUNTS  PAYABLE— NOT  DUE 

MBBCHANDISE— rINISHSO 

ACCOUNTS  PAYABLE— PAST  DUE 

MBBCHANDISE— IN  rBOCESS— UKriNISHED 

DBPOSITS  OP  MONEY  WITH  ME 

MEBCHANOIW— HAW  MATSBIAL 

AMY  OTHER  CURRENT  LIABILITIES— 
(■■•Mb«  •■  P.ai  4) 

TOTM.  ACTIVE  ASSCTS 

TOTAL  CUmiCNT  UABIUTIES 

...        „— ..  ■  .n      »0«  ifEBCHANOISE 

MORTOAOES  OR  LIENS  ON  REAL  ESTATE 

OBAU..EOCOHCE.NS             „,  ,„^^„^„ 

CHATTEL  MORTCACES 

STOCKS.  BONOS  AND  INVESTMENTS 

ANY  OTHER  LIABILITIES— ftofa. 

LAND 

BUILOtNOE 

MACH1NCKY,  EQUIPMENT  AND  riXTUKES 

MOBSES.  WAOONS  AND  AUTOMOBILES 

TOTAL  LIABILITIES 

OOOO  WILL,  rATEHTS  AND  TKADEMAKKS 

OTHBB  ASSBTB-ltanlM 

TOTAL 

TOTAL 

_ 

1 

CONTINOENT  UAtlLrtV  OF  ANY  KINO 

UPON  RECEIVABLES  DISCOUNTED  OB  PLEDOED                                                                                                     

CUSTOMERS'  ACCOUNTS  SOLD  AND  ASSIONEO 

AS  GUARANTOR  POR  OTHERS  ON  NOTES.  CONTRACTS.  AND   SO  OH 

POB  LBASBB                                                                                                                                                                                    -    

1 

Figure  20:  On  this  and  the  next  three  pages  is  shown  a  slightly  differ- 
ent type  of  statement  than  the  one  illustrated  in  Figure  19.  It  is  a 
form  for  individuals  engaged  in  manufacturing  or  mercantile  lines; 
therefore  facts  must  be  included  to  cover  the  commercial  points  involved. 

45 


T! 


II 


Figure  20  (pages  2  and  3):  Here  are  illustrated  several  interesting 
points  in  making  up  a  statement  form.  Note  at  the  top  the  expense 
and  income  tabulation  for  quick  reference,  foUowed  by  a  proof  of  net 
worth  and  aU  details  regarding  assets.    Special  attention  is  given 

46 


i 


LAND  MfD  BOOOmOS 

I  OfTHKM  f 

Dmatt*tmtm4VatMiam 

TItk  ■■  WlHM*  Nmm 

VahM 

Vatac 

llart«at« 

Inir—rr 

Result  Rccci*«l  Durinc 
LMtrwulYcar 

t 

t 

< 

f 

t 

.WKBNf. 


BV  WHOM  APPRAISED?. . 

IF  BOOK  VALUB  HAB  DBOIBASBD  OR  INCRSASSD  OURINO  THB  YEAR.  ACCOUNT  POR 


■AVB  VOO  ANT  LBASSNOUM  NOT  MBNTIONBD  IN  YOUR  ASSKTSr. 


_OIVB  DETAILS. 


OTHBR  ACTIVE  AS»T«>-ttMlM. 


DUB  PROM  CONTROLLED  OR  ALLIED  CONCERNS: 

NaoMsf  Coaon 

LonliM 

Por  AdvaacM 

TtnM 

ParMcKhHMliM 

Ttraw 

1 

$ 

DETAILS  REUTIVC  TO  LIABILITIES 
NOTBS  PATABbB-MAMB  YOUR  BANKS  AND  BROKERS  AND  LINE  WITH  EACH: 


WHAT  TIME  OP  TKB  YEAR  DO  YOU  BORROW  OP  YOUR  BANKSr. 


.THROUOH  BROKERS?. 


STATB  maximum  amount  BORROWED  PROM  ALL  SOURCES  DURING  PISCAL  YEAR  JUST  CLOBEOI 

DO  YOUR  BRANCHES  OR  ALLIED  CONCERNS  BORROW  LOCALLY? WHERE? 

DO  YOU  BORROW  CONTINUOUSLY  IN  OPEN  MARKBT? POR  MERCHANDISE? 

OTRBBWt8B?^____-AMOUNT  OP  YOUR  NOTES  PAYABLE  SECURED  BY  COLLATERAL  • 

DBSCRIBB  THB  COLLATERAL  


ACCOONTS  PAYABLB— WHAT  ARE  YOUR  AVERAQB  TERMS  OP  PURCHASE? — 

DO  TOO  DIBCOONT? ANTICIPATE? NAMB  A  PEW  CONCERNS  PROM  WHOM 


TOO  rUBCRASB  Of  LAKOB  QUANTtTIBB:. 


OBPOBRS  OP  MONBY  WITH  MB -ON  TIMB  OR  OBMANOI. 
PROM  WHOM?  


_BATB  PER  CENT  PAID?. 


GXATTBL  MORTOAOEB-TO  WHOM?. 
OH  BTHAT  ASSETS  A  UMW 


.AATB  OP  MORTOAOS?. 


.TERMS  OP  PAYMENT?. 


JtOn  IT  REPRESENT  A  PAST  OP  PURCHASE  PWCB>. 


IT  RBPRBSBNT  BORROWED  MONBY?- 
VOU  LBASIMO  ANY  PROPSBTV?. 


.WHAT  ARE  THE  TBRMS  OP  THB 


to  the  data  relative  to  merchandise,  equipment,  and  so  on.  On  the 
following  page  come  all  the  facts  covering  land  and  buildings,  both  in 
and  out  of  the  business  proper.  Liabilities  also  have  to  be  fiilly  de- 
scribed in  order  to  give  the  banker  all  the  information  he  needs. 

47 


'!f 


If 


Iji. 


I 


OTRIB  CUSSENT  LtABtLITIES—li 


MISCELLANEOUS 

CREDIT    $_ 


INSURANCE— ON  MERCHANDISE  t 

Lire    t WHO  IS  THE  BENEFICIARY/ 


.LIABILITY    t. 


HOW  LONG  ENGAGED  IN  PRESENT  BUSINESS  >. 


WHAT.  AMOUNT  OF  CAPITAL  DID  YOU  START  WITH  AND  OP  WHAT  DID  IT  CONSIST  > . 


WHAT  AMOUNT  OF  CAPITAL  HAVE  YOU  CONTRIBUTED  SINCE  /. 


IS  THERE  ANY  OTHER  PERSON  INTERESTED  IN  YOUR  BUSINESS  EITHER  AS  SPECIAL  OR  LIMITEO 
PARTNER  > 


ARE  YOU  A  PARTNER  IN  ANY  FIRM  7. 


WHAT  IN  YOUR  OPINION  IS  THE  NET  WORTH  OF  EACH  INDORSER  ON  YOUR  NOTES  7- 


HAVB  YOU  ANY  ASSETS.  OTHER  THAN  REAL  ESTATE.  PLEDGED  OR  HYPOTHECATED  IN  ANY  WAY*. 


ANY  INDIVIDUAL  DEBTS  NOT  INCLUDED  IN  THE  STATEMENT  ?_ 
ANY  INDIVIDUAL  ASSETS  NOT  INCLUDED  IN  THE  STATEMENT  ?. 

TIME  or  YEAR  RECEIVABLES  GENERALLY  MAXIMUM 

TIME  OF  YEAR  MERCHANDISE  GENERALLY  MAXIMUM 


.MINIMUM. 


STATE  CROSS  SALES  FOR  THE  PAST  THREE  YEARS— 19 $. 

WHBRB  IS  YOUR  PRINCIPAL  SALES  TERRITORY? 


MfMlMtlM 
-t l» t . 


IP  YOUR  BOOKS  HAVE  BEEN  AUDITED  BY  A  CERTIFIED  PUBLIC    ACCOUNTANT.  OtVB   NAME  OT   AC- 
COUNTANT  AND  DATE  OP  AUDIT . 


ARE  THERE  ANY  JUDGMENTS  UNSATISFIED.  OR  SUITS  PENDING  AGAINST  VOO.  AND  FOR  WHAT 
AMOUNT? 


GIVE  DATE  YOU  REGULARLY  TAKE  INVENTORY  AND  CLOSE  YOUR  BOOKS. 


TIM  langoin*  Matemmt*  and  drtail*  pcnnniBc  (iMntai.  boik  prial«4  wtd  writtM.  kava  Mm  MraAilly  rM4  by  dM 
•d.  lad  I  hereby  Micawly  dtclar*  muI  ccntfy  UM*  Mm*  m  a  fuU  aa4  cemct  obibtl  ul  ay  *»Mrtal  ~.-..fit.T« 


SIGN  HERE . 


DATE  SIGNED. 


.». 


NOTE:     If  y«t  ha**  any  diAculty  la  Allut*  la  tlM  ftwualag  ataunMat*  aiMI  ^aaaHoMiaira.    iIm  CrtdJi  DawtMM  af  ttto 
baah  ta  pnpaMd  M  t«a>d  you  coMftaona  »mi  MWalliiM  aarvwa;  ia  Uci.  «• 


I 


Figure  20:  The  last  page  of  the  statement  includes  a  fund  of  miscel- 
laneous information  of  considerable  value  in  sizing  up  the  various  ten- 
dencies of  the  borrower.  With  it  all,  the  form  is  easy  to  read  and  ar- 
ranged to  enable  the  customer  to  fill  it  out  without  great  difficulty. 

48 


CLASSIFYING  THE  RISKS 


49 


themselves  have  proved  worth  while  aside  from  their 
simple  classification. 

The  bank  divides  the  various  lines  of  business  of  its 
customers  under  20  heads,  such  as  grocers,  automobile 
manufacturers,  department  stores,  steel  companies, 
and  so  on.  It  keeps  this  classification  by  number  and 
arranges  all  the  cards  in  the  file  under  subdivisions 
from  1  to  20.  Each  separate  card  has  its  proper 
number  entered  at  the  top  center,  precisely  like  the 
illustration.  If  the  key  shows  that  automobile  manu- 
facturers are  niunber  1  in  the  classification,  then  each 
automobile  manufacturer's  card  is  identified  instantly 
by  the  number  1  at  the  top.  The  clerks  file  the  cards 
alphabetically  under  each  subdivision.  In  practice,  if 
a  lending  officer  wants  any  information  quickly  about 
the  Monarch  Motor  Company,  he  has  only  to  look 
under  M  in  division  munber  1  to  find  the  desired  card. 
Should  by  chance  the  card  be  misplaced,  he  still  has 
the  personal  file  covering  the  financial  status  of  the 
individual  officers  to  fall  back  on. 

ANY  PLAN  THAT  LESSENS  THE  ROUTINE  AND  REDUCES  THE 
CLERICAL  EXPENSE  IS  WORTHY  OF  CONSIDERATION 

The  key  munber  at  the  top  of  each  history  identifies 
it  at  once,  so  that  a  clerk  can  file  it  away  properly  in 
the  least  possible  time.  The  file  is  of  incalculable  value 
in  handling  the  day's  credit  work.  Even  a  small  bank 
would  find  such  a  classification  worth  while  because 
it  would  minimize  the  routine  of  the  lending  officers. 

These  histories  also  come  under  a  general  classifica- 
tion in  some  banks  just  the  same  as  the  personal  file. 
For  instance,  one  bank  divides  the  records  by  listing 
them  under  headings  such  as  personal  credits,  mer- 
cantile credits,  industrial  credits,  and  so  on.  This 
general  classification  is  particularly  desirable  for 
smaller  banks  which  do  not  want  too  much  system 
and  division,  but  enough  to  simplify  the  work.    Other 


I 


i 


Hi 


niMNCIAL  STATEMCNT 

COHPOKATB  NAMB 

eORfOMTKM 

•VSINBaS 

MAIN  OmCB                                                                                    LOCATION  OT  PLANT 

•RANCNBS 

TO  UNION  COMMEJiCE  NATIONAL  BANK,  CLEVEUNO,  OHIO 

ro«  T«  pvKKiM  or  PKocuaiNQ  cKBorr  moM  timb  to  tims  witm  vov.  roil  aum  mooTiABu 

WW*.  W«  rURNISM  TM«  rOLlOWINQ  *■  A  THUS  ANOOOKMCT  ■TATBMBMT  0»  OW«  riN AMCIM.  COWOITM 
AND    HSMSBV    AOIWC    TO    NOTirV    VOV    ll(MBOIATW.V    IN  WaiTINO.  OT  AMY  MATSaiAIXT  UMVAVOI 
Oim  PIMANCIAI.  COMOrriOM       IN  Turn   AMBNCS  or  aOCM  HOTICS  0«  A  Mnr  AND  PWU.  waiTTBN 
IS  TO  H  CONMtD«nO  AS  A  CONTINVtNO  ITATSMBMT.  AMO.TMAT  OVS  rWUNIAIIV  RnfONSiaittTV 
■BLOW  TKB  CONOrriOM  KBKBIN  SBT  rOMTH 

PArB«o«oniBa 

Ml  ON               It 
lABLB  CNANOB  M 
ITATBMBMT.  TNH 
HAS  NOT  PAUL*! 

■w^-Vaw'-N*"* 

1 
1 
1 

MKTS 

CBNTS 

UABHJTICS 

DOLLARS 

CBNTS 

CASH  ON  HAND 

CASH  IN  BANK 

NOTBS  PAYABLB  TO  BAmCS 

NOTBS  RBCBIVABLB  OT  CUSTOMBKS— 
DUB  WITNIN  W  DAYS 

NOTBS  KBCBIVABLB  OF  CUSTOMBM- 
DUB  aSYONO  M  DAYS 

NOTBS  PAY  ABLE  TO  OFFICERS. 
OIRBCTORS  AND  STOCK  HOLORRS 

NOTBS  PAYABLB  TO  OTMBBS 

MBaCRANDItB— riNISHBO 

ACCOUNTS  PAYABLB— NOT  DWB 

SBIKHANDnB— IN  PBOCIIS 

ACCOUNTS  PAYABLB— PAST  DUB 

VNVINISHBD 

MBBCHANDISB— HAW  MATMIAL 

DIRSCTOHS  AND  STOCKMOLOBM 

OTHBR  ACTIVB  ASSBT»- 
(Innuc  oa  Pao  1) 

DBPOSITS  OP  MONEY  WITN  THIS  COM- 
PANY BY  OPPICBRS  AND  OTHERS 

Of  !■■  «•  Pact  41 

TOTM.  ACTIVC  ASSETS 

TOTAL  CUftRCNT  LIAIIUTIU 

FOR 
MBRCRANDIBB 

MONTOAOBS  OR  LIBMS  ON  REAL  BSTATB 

FOR 
ADVANCES 

BONOBDOBST 

LAND 

ANY  OTHBR  U  ABILITIES— IWM« 

■UtLOINOS 

MACHINBBV.  BQUIFMBNT  AND 
PIXTURBS 

HORSBS.  WAOONt  AND  AUTOMOBIUtS 

NOTBS  RBCBIVABLB— OUB  FROM  OfTl- 
CBRS.  STOCKMOLOBM  AND  BMPLOYKBS 

TOTAL  LIABIUTIU 

CBBS.STOCKHOLOBRSANO  KMPLOYCBS 

RESBRVB»-lMB^« 

OOOO  WILL.  PATBNTS  AND 
TRAOBMARKt 

CAPITAL  STOCK- 
PREFERRED  OUTETANOINO 

CAPITAL  STOCK - 

COMMON  OUrSTANDINQ 

UNDIV1DBD  SURPLUS 

TOTAL 

TOTAL 

CONTINQtNT  UASILITY  OP  ANY  KINO 

UPON  RBCmVABLBS  DISCOUNTBD  OR  PLXOCBD 

UPON  ACCOMMODATION  PAPKR  OR  INDORSBMBNTS 

UPON  NOTBS  BXCHANOBO  WITM  OTMBBS 

CUSTOMKRS-  ACCOUNTS  SOLD  AND  ASBMNBD 

AS  GUARANTOR  FOR  OTHERS  ON  NOTBS.  CONTKACTa,  AND  SO  ON 

POR  BONDS  OR  UNFtNUHBO  CONTRACTS 

POR  LBASBS 

eOHOCMWO  PROTTT  AND  VOm  tr  ATSlBMt  I 


I  ycM."T»Mr«wp«wa- 


BJCPBNSB 

■■" 

■■" 

""■^ 

INOOMB- 

Mif  6f  llAflRiAL  o*  meMHaMMH 

CONSUMED 

NBT  BALBS 

A^TVAL  BKPBNS*  OF  CONDOCTINO  BUS! 

SALABIBS  PAID  TO  OTPICBBS 

mOM  DISCOUNTS  ON  PURCHASBS 

■NTSRBST  ON  BORROWED  MONBT 

BAD  DBBTB  OUBOBb  orP 

BMMRCtATlOM  CMABOBD  OPP 

HBT  PMJSIIS 

TOTAb 

^^^ 

^^ 

^^_ 

TOTAL 

_ 

— 

— 

OMOtVIDSS  KnVUH  AT  CLOB  OV 

CHAMOBS  NOT  APHJCABLB  TO  CUBXBNT  VBAR. 


mCONCILONCNT  OP  SUWUM- 

PiaCAI.  YSAB  I. 


t 


LHBonnoBMpa  i 


UNDtVlOP  10>W*WS. 


DETAILS  RELATIVE  TO  ASSETf 
ACCOONTB  AKB  MAnrrAINBO 


JltTMDBAWAU 


.  AMOUNT  (. 


MU.ANT  ACCaBltXl.SU«JBCT.TD  NOtlCK 

DOH  TIB  AMOOMT  KBPOKTtQ  M  CO*  OM  HAllO  COKTAIM  ANYTHINO  OTMXB  TSAN  LBOAL  MOMBY'- 

MOm  MBCBfVABLB  0»  CUBTOMBS»-«m*T  AliOUHT  OOSB  MOT  RKPRBSKNT  MBNCNAHPOKJPAUV 

«BPRBSBNT8  WAT>  — — 


WHAT  AMOUNT  RBPRBSBNTB  OfCN  ACCOCMTB  iBTTLBO  BY  MOTB». 
H  ABU  TO  OOUbBCrr AMOUNT  OVBBOOW 


.  AMOUNT  YOU  MraaAaLT.«njuMot 


.AMOUNT  BBMBWBD  OB  BXTSNOCDT. 


p 


Figure  21:  It  is  especially  advisable,  bankers  have  found,  to  have  a 
complete  line-up  of  facts  on  the  financial  status  of  corporations.  Here 
are  the  first  two  pages  of  a  corporation  statement.  Note  the  variation 
in  the  items  under  assets  and  liabilities  in  contrast  to  the  other  forms. 

50 


ACCOWNTB   HfeCBIVAaUl    OP    CUBTOMBm-WMAT    AMOUNT  DOBS  NOT  KBPRBSBNT  MBBCMANDISB  SALBS?. 
■BPRBSBNTS  WMAT> — _ — — 


AMOUNT  YOU  PROBABLY  WILL  NOT  BB  ABLE  TO  COLLBCTf 

WMAT  ABB  VOUB  AVBBAOB  TBKMB  OP  SALW.. . . — 

aiVB  NAMES  OP  A  PBW  CONCBNNS  TOWMKB  TOU  BLL  m  LABOB  QUANTITIBB: 


.AMOUNT  OVBBDUKt- 


MBBCBANOtSB-LABT  INYBNTOBT  TAKEN  NT  WBOM' 

VALUBD  AT  COBT.  OB  MAKKBT  PKICB  AT  DATB  OP  INYBMTOBT  OB  OM  WHAT  BASIS-POB  PtmBRKD? 

POR  UNPINISMBD  IN  PROCBWr POR  BAW  MATEMALf AMOUNT  PLBOOKD  AS  SBCUBRVr. 


ANT  RBCBNTLV  RBCSIVBD  AND  DICLUDBD  IN  YOUB  ASBBTS    POB  WMKN 
•■  ACCOUirn  PAYABLE? 


mvOICSS  BAYS  NOT  YKT 


AMOOWT  m  OUTSIOB  WABXMOUtBW 

AMOUNT  BXLO  UMDBB  TBVST  BBCBIPTr. 


.UBDBB  CONEWNMBNTT. 


V  STOCK  ntESH  AND  SALABLE  TKROUONOUTI 

WHAT   AMOUNT  MAS  BBBM  CNABOBO  TO  OBPBBClATION.OUBIMa 


MVBKAOB  AMOUMt^OP  BTOCX  CABBIBIW. 


ITUO- 


VALUBOl 


MACaiMBBV.  BQUIPMBNT  AND  PtXTVBBB—  i 


<  VALUB  •. 


WBAT    AMOUNT    MAS   BBBN    CNABOBO   TO   OBPBBCIATION  DUBIMO  ' 


:  PABT  VSAB  OH  TlOi  ItSMT. 


The  capital  items  must  be  included.  The  second  page,  too,  is  worth 
careful  checking.  Special  spaces  are  reserved  for  a  reconcilement  of 
the  surplus  items.  This  is  of  interest  to  every  banker  for  it  shows 
exactly  how  this  account  stands.    Then  follow  the  details  about  assets 

51 


J 


I, 


I; 


I 


UklfO  AND  Km.oim«: 


TMI>  la  WkM>  N«B« 

*— V-« 

u,^ 

. — 

LaMPlM^Vnr 

t 

* 

t 

1 

1 

■V  WHOM  ArrMAino. 


W  BOOK   VAI.UB  MAS   OSCKBAKO  OK   IMCKBAWO  OCMMO  TMI  YEAIt,  ACCOUNT  rOM  aAM«. 


HAVs  YOU  Ainr  uusshold*  not  mkntionkd  in  youk  ambtv. 


•  OIVB  DSTAIU. 


OTMn  ACTIVB  AMBT«.<-iM 


OUB  mOM  CONTHOLUtO  Oil  ALLIBD  CONCBMNtt 


HtmoICa 


Far  Adra 


NOTSS  RBCBIVABLS— DUB  niOM  OPPICBm.  ITOCXHOLOBM    AND  BMFLOVBBI 

- 

Nam 

»1D«M 

Ttwv 

Oattof 
NsM 

Dm  DM* 

Whoto  or  ta  Pan? 

I>tl 

■aniradr 

Ha«> 

* 

ACCOUNTS  HBCBIVABLB— DUB  PBOM  OPriCBM.   STOCKHO(.OCM  AND  BMPUJYBSa 

Naraa 

AaoMM 

OaM 

Data  Dm 

UK 
•acand7 

»amt 

I 

DETAILS  RELATIVE  TO  LIABILITIES 
WOTBS  PAtABLB— NA»a  YOU*  BANKS  AND  BMOMUIS  AND  LINB  WITH  BACH.. 


WHAT  TiMB  <^  TMB  YBAN  DO  YOU  BONNOW  OP  YOVB  BANKSr. 


_naiOUOM  BBOKBKS»_ 


•TATB  MAXIMUM  AMOUNT  BOKBOWKD  ntOJt  AU.  SOUBCBS  DUKtNO  PISCAL  VBAB  TUST  CUmo  »- 

DO  YOUm  BBANCHBS  OB  ALLMD  CONCERNS  BOKMOW  LOCAU.Y> WHBRBr 

DO  YOU  BOBBOW  CONTHtVOUSLV  IN  OPBN  MAMKBT;. 
OTHBBWISBr  ____ 


.FOB  MBRCHANOISBr. 


.AMOUNTOPYOUBNOTBSPAYABUnBCUXBOBYCaLLATBNAI.    •_ 


DBSCRIBB  TUB  COIXATBBAl.. 


BCCOOim  PAY ABIB— WHAT  ABB  YOUB  AVBRAOB  TBBMS  OP  PURCNASBK- 

OO  TOW  OiaCOUNT> ', ANTICIPATSf 


.NAMB  A  PBW  COMCBRN*  PROM  WHOM 


VOO  PURCHASS   IN    LAROB  QUANTITIBS.. 


Figure  21:  In  addition  to  the  description  of  land  and  buildings  at 
the  top  these  two  pages  contain  spaces  for  a  lot  of  additional  credit 
information.  For  instance,  all  accounts  and  notes  receivable  due 
from  officers,  stockholders,  and  employees  are  listed,  with  details, 

52 


O*  MOmV  Wm  TBS  OOKPOBJinOH  •* 


u>f  iCBia  q«  onmn  owTMBOKnmAMoy — 

PAim. 


■OMOKO  OBBT-WKBM  DOB*. 
JiMt.  AUTHOR  UBO  « 


.WHAT  RATB*. 


.ON  WHAT  ASBTS  A  UMM  «. 


.^hMT.  nSCBO  ». 


.  WHO  a  TRUSTER}- 


PROVBIOH  POR  RRTIRBMKNT_ 


CHATTKI.  MORTOAOBB-TO  WMOSO- 
OM  WHAT  ASSBTt  A  USOT 


.OATB  OP  MORTGAGE? TERMS  OP  PAYMENV. 


.DOBS  IT  RBPBESSirr  A  PART  OP  PURCHASE  PRICED 


DOBS  IT  RBPRESBITT  BORROWBD  MONBYf. 
tSASBB— ARE  YOU  LEAStNO  AMY  PROPERTY?- 


.WHAT  ARB  THE  TERMS  OP  THE  LEASBS?- 


OTHBR  CURRENT  UABIUTtES—tlMinu 


CAPITAb-HOW  PAID  nO-'CABH    S. 


MISCELLANEOUS 
.  OnrKBR  PROPERTY  AND  HOW  VALUEIK- 


ARE  PREPRRRED  STOCK  OIVtDBNDS  CUMUUtTIVBy 
ORGANIZED  UNDER  UAWS  OP  WHAT  STATE? 

IN  WHAT  STOCK  IS  VOTINO  POWER  VESTED? 

fMSORANCE— ON  MBRCHANDtSR  t CREDIT  t 


.  DIVIDEirD  RATE? PRESENT  UNPAID  ACCUMULATION  1 

ARE  YOUR  BRANCHES  DJCORPORATEO  SEPARATELY? 


■XlAflH.TTY  t- 


.LIPC  »- 


mOORSBRS-WRAT  B  THE  MET  WOimi  OP  BACH  INOORSER  OUTSIDE  OP  WfTERBST  IN  THIS  BUSINBSS?. 


PPPICBRS  AND  OIRBCTORS  (NMM  te  I 


PRESIO«?IT. 


VUX-PRBStDBNT  . 


TRBASUXBK. 


?niMBBR 

SHARES 

HBLO 


Pfd.     Com 


ADO] 


TIMB  OP  TEAR  RBCBIVABLBS  OENERAiXY  MAXIMUM- 


.MonMini. 


TIME  OP  YEAR  MBRCHANDtaS  OENERALLY  MAXtMUM- 


MINIMUM- 

_I« s 


•TATB  OBOBS  SALBS  POR  THE  PAST  THRBB  YEARS— 1» 1 

WaSHB  IB  YOUR  PRINCIPAI.  SALBS  TERRITORY? ■ — 

IP  YOUR  BOOKS  HAVE  BESM  AUDRBO  BT  A  CBRTIPIED    PUBUC  ACCOUNTANT.  GIVE  NAME  OP  ACCOUICTANT  AND 

DATS  OP  AUDIT  — _____^ 

ARB  THERE  ANY  JUOOMBNTB  UNSATISPIBD.     OR  SOTrB      PENDING     AOAINST    YOUR  caRPORATKMi     AND  POR  WHAT 

AMOUNT? «__— ^ 


OIVB  DATE  YOU  REGULARLY  TAKE  INVENTORY  AND  CLOBB  YOUR  BOOKS- 


I  and  flrtrta  iiiilri»hi  ikoatai,  back  prtalad  and  wtintm.     kan  bna  canAiBr  nad  by  tha 
a^m^r  4ad«a  ^itf  aanilk  IbM  ^aa  to  •  bin  aB<  cacnct  axhibit  afaai  ftnanfial  cnwIltinM 


,TB  NAME. 


DATE  BMUIKBL. 


If  ima  ba««  aay 

•naad  twm  aaw 


(OacB'a  title  aMal  bt  gmmti 
■  m4  ilaiMliiaiiahl.   Iba  Cradit  Dapaftmnt  of  tUa  barak  la  pialMiad    t> 


as  well  as  various  data  on  liabilities.  In  addition  are  entries  describe 
ing  the  bonded  debt,  leases,  stock,  insurance,  and  so  on.  Next  comes 
the  list  of  officers  and  other  worth-while  information.  Here  again  the 
simplicity  of  arrangement  and  of  the  questions  make  the  form  effective. 

53 


I.. 


I 
I 


I 


54 


TESTED  CREDIT  METHODS 


banks  find  that  it  helps  to  have  all  their  credit  informa- 
tion classified  in  accordance  with  the  different  state- 
ment blanks.    These  come  under  the  headings: 

1.  Individual 

2.  Individual  (manufacturing  or  mercantile  lines) 

3.  Corporation 

4.  Partnership 

These  statements  (Figures  19,  20,  21,  and  22)  are 
reproduced  complete  in  this  chapter  because  they 
suggest  ideas  for  classification  and  for  minimizing 
credit  risks.  Each  method  of  classifying  customers 
from  the  lending  standpoint  has  its  desirable  features 
according  to  the  location,  the  size,  the  organization, 
and  the  arrangement  of  a  bank.  Institutions  in  rural 
conmiunities  must  give  greater  attention  to  classifying 
farm  risks,  as  indicated  in  the  voliune  on  loans  and 
discoimts.  Some  city  banks  find  it  convenient  to 
classify  loans  in  still  another  way  imder  the  headings: 

1.  Manufacturing 

2.  Wholesaling 

3.  Jobbing 

4.  Retailing 

The  value  of  this  arrangement  has  been  proved  in  a 
number  of  instances.  For  example,  it  enables  the 
credit  officer  to  check  his  loans  easily  against  trade  or 
market  developments.  Suppose  a  sudden  change 
comes  in  the  status  of  labor  in  the  manufacturing 
field.  The  risks  affected  by  this  influence  can  be 
checked  up  immediately  by  running  through  the 
records  of  the  manufacturing  division.  If  financial 
conditions  make  retailing  more  precarious  than  usual, 
the  credit  officer  can  tell  with  minimum  effort  just 
how  he  stands  on  loans  of  this  character,  and  how  he 
can  proceed  to  protect  the  bank's  interests.  This, 
bankers  agree,  is  mighty  worth  while. 


CLEVELAND  CLEARING  HOUSE  ASSOCIATION  FORM 

PMANOM.  tTATCMCNT 


fMITNCMHV 


WAiuor  rtMM 


MAIN  omcs 


LOCATIOWOr  HAWT 


•KAHCKM 


TO  UWOII  COMMEUCE  MATIOMAL  BANK,  CLEVEUND.  OHIO 


MR  Tm  «•.«)«  or  PIWCUKIHO  C«DIT  rmOM  TIM  TOTll«Wm.rO«.r01IOU«l«OOTlAW*PAFMO«OIH«ltWl««. 

wm  pvmnmi  thb  roixowwo  as  a  tiiu«  ai.o  eow«CT  .t at«i«nt  or  ou«  r ikakciai.  compitiow  ow  ^-,.^,'*^ 

^  J^JS^IATcwJomoH  II.  T«  ABttMC  OT  KKMI  HOTIC  0«  A  WW  AND  rUIX  WHITTEN  STAT.M.NT.  THIS  tt 
?rJc^.^««^*C?^KT.m,.NO  «*«««.  Am  T«At  OV.  »«CWnA.T  «»ON«.aJTY  HA.  HOT  r*U*N  H 
U)W  TM    CONDITION  M«KE1N  B«T  rOItTM. ., .n  ,.-U_  -  liH.  .'n,  r-.-       O- A.  — *   "T-.-  -*."   - 


AMCTS 


CASN  CM  MAMO 


CAMi  M  BAMti 

NOTU  KKCSIVABLR  OT  <IU*IuUB«*— 
PUB  WITHIN  f  DAY* 

Hgittt  nacKivAM*  or  cwTOMr— 


;  aCYOND  ••DAY* 


ACCOWCTt  KKOIVAMJ  OT  CVtTOttMMM 


CBNT* 


MKUCMANDIM— riNISHKP 
IfBUCHANOlU— IN  mOCI 


UNTINWHKD 


MM»CHAWDM»— HAW  MATmKUU. 


OTMSa  ACTIVK  AMTW-OflM  mm  Ht  »1 


TOTAL  ACTtVC  ASSETS 


DVB  rKOM  CON- 
TKOtXBD  OK  AL 
USD  CONCUUa 


roil  miiCHANDin 


UABIUTIES 


Noras  PATAM*  row  UMMCtUMOnm 


NOTKS  PAYAMA  TO  ■AIOM 


NOTM  PATABLK  POK  PAPBK  10U> 


■tOTSS  PAYABLM  TO  PA»TN»K« 


NOTB»  PAYABtB  TO  OTHEKt 


ACCOUNTS  PAYABIJ— NOT  PUB 


rOH  AOVANCBS 


STOCKS,  BONDS  AWO  INVESTMBICTt 


LAND 


■UILOINOS 


MACHINBBV.  BQUIPMBMT  AND 
rlXTUBBS 


Accowrrs  pay  ablb— past  pwb 


ACCOUNTS  PAYABIJ  TO  PABTNBKS 


CBKTS 


DBPOSITS  OP  MONKV  WITH  THIS  I  COM- 

run  BY  paktnbks  and  others 


OTKBB  CtnUWNT  LIABIUTIBS— 
gtm^m  «  Pf  «> 


TOTAL  ClNlflENT  UABIUTIES 


MORTOACBS  OK  LIBNS  ON  UAL 
BtTATB 


CHATTBL  MOBTOAOBS 


HOKSBB.  WAOOWS  AND  AUTOMOBILBB 


NOTBS  BBCBIVABLB— DUB  PROM 
PABTNBBS  AND  BMPiaYBBS 

ACCOUNTS  RBCBIVABLS— DUB  PBOM 
pSiTNBRS  and  BMPtX>YBBS 

OOOO  WILL.  PATBNTS  AND 


TBAPBMAMtS 


TOTAL 


ANY  OTHER  LIABILITIBB— In 


TOTAL  UABIUTIU 


RKSER  VBS— ItsiM 


NBT  womii 


= 


CONTINGENT  UA8ILITY  OF  ANY  KIMD 


WrOM  BBCBIVABLBS  DISCOUNTBP  OR  PLBOOBP 


UPON  ACCOMMODATION  PAPER  OR  INPOR««M«WTl 


OPOM  WOTBS  BXCHANOBP  WITH  OTWBR* 


COBTOMBRS-  ACCOUNTS  SOLD  ANP  ASSIOWBP 


AS  OUARANTOR  rOR  OTHERS  ON  NOTES.  CONTRACTS.  AWP  SO  OH 


rOR  BONDS  OB  UNPINISKEO  CONTRACT* 


Figure  22:  Still  different  from  the  credit  forms  already  shown,  is  the 
one  on  this  and  following  pages,  illustrating  a  partnership  statement. 
The  fundamentals,  of  course,  remain  the  same,  but  the  items  vary 
to  cover  the  partnership  requirements.     Each  page  is  reproduced  in  fulL 

55 


\ 


ii 


>  ntorrr  and  vem  trATSMiirr  vo*  ratti.  rkuMtmotm^ 


J* 


BXntIMB 

•MOM. 

^ 

^^"^ 

^"^" 

COHSUltSO 

NBT  MLBS 

ACTVAL  kxMthk  or  tcmbvcixm  atnk 

* 

FWMf  iMvnrtlBNTt 

MiraCTi  rAio  to  rAXTNBMs 

raoM  oacovNT*  om  iiiTNiwi 

■AO  ocvn  csAWwo  o»* 

BSnUClATION  CMAMOBD  OTT 

HBT  VlUJf  IIS 

TOTAL 

___^ 

TOTAL 

RCCOMaUMCNT  Or  NET  WORTH 
mr  mtmrm  at  cumb  or  pmyiow  rae*L  »—       i 

UM  CWABOM  NOT  ArrUOAMLB  TO  CUMUNt  VBA> ^^^i™^^^^^  •- 

ADO  NBT  PBOrm  AB  taavw  , 


-WITNDBAWALB  BY  PABTNBM,  OTNBB  THAN   ■AIAWIBB  At  ABOV*. 
NBT  WOKTII— <>■■  9nn  »t») _. 


OCTAIU  MELATIVC  TO  MSCTt 

ACCOUNTS  ABB  MAINT  AINBD  ^____ 


AMB  ANY  ACCOUNTS  SUBJBCT  TO  NOTICB  BSMSM  WtTNOBAWAL'. 


.AMOVNTI. 


DOBS  TMB  AMOUNT  RBKWTBO  AS  CABN  ON  NANO  CONTAIN   ANYTNINO  OTHBN  THAN  LBOAL  MONBY>. 
NOTKS  BBCBIVABLB  OF  CUSTOMBIN— WHAT  AMOUNT  DOBS  NOT  BBPBBSBHT  MBKCNANSISB  «*|  H» 
HBmBSBNTS  WMATf 


WHAT  AMOUNT  BBMOSBNTS  0»*N  ACCOUNTS  SBTTLBO  BY  NOTBW 

BB  ABLB  TO  COLLBCTr AMOUNT  OVBBOUB> AMOUNT  KBNBWBO  OB  BirTBMDBD'. 


.  AMOUNT  YOU  fWOBABLY  WILL  NOT 


ACCOUNTS    HkCBIVABLB    OT    CVSTOMBBS-WNAT    AMOUNT  DOBS  NOT  BBMBSBHT  MBBCMANOISB  SALBM. 

BBrKKSBNTS  WNAT>  __»___^ 


AMOUNT  YOU  PBOBABLY  WILL  NOT  BB  ABLB  TO  COLLBCTT. 
WHAT  ABB  YOUB  AVBBAOB  TBBMS  OT  SALB? 


.  AMOUNT  OVBBOUB>. 


OIVB  NAMBS  or  A  FBW  CONCBRNS  TO  WNICN  YOU  SBLL  IN  LAKOB  OUANTITIBS: 


MBBCHANDISB— LAST  INVBNTORY  TAXBN  BY  WNOM>. 


.  WNBNr. 


YALUBO  AT  COST.  OM  MABKBT  PBICB  AT  OATB  OT  INVXNTOMY  OM  ON  WMAT  BASIS-TOR  riNISMBD* , 

roB  UNPtNismo  in  ntocBssr pom  maw  matbrial> amount  rLBOOBO  as  sbcubity?_^___ 

ANY  BBCBNTLY  RBCBIVBD  AND  INCLUOBD  IN  YOUM  ASSBTS    ro«  WNICM  TMB  INVOICBS  MiOrB  NOT  YBT  BBBN   BNTBRBO 
AS  ACCOUNTS  PAYABLBr 


AMOUNT  IN  OUTSIDB  WABBHOUSBSr. 


AMOUNT  NBLD  UNDBB  TRUST  MBCBirrr. 


_UNOBM  CONSIONMBNTr. 


U  STOCK  PRBSM  AND  SALABLS  TNMOUOHOUTr. 


.AVBRAOB  AMOUNT  OT  STOCK  CARRIBOr. 


WMAT  AMOUNT  HAS  BBBN  CHAROBD  TO  DBPRBCIATION  DURINO  THB  LAST  YBAR  ON  THM  ITBM>. 
•TOCKS.  BONOS  AND  INVBSTMBNTS-«IVB  DBSCRimON  AND  HOW  VALUBD 


MACMINBRY.  BQUirMBNT  AND  riXTUBS 


ID  VALUB  I. 


WNAT   AMOUNT   HAS  BMN   CHAROBD   TO   DBMUCUTION  DURINO  THB  FAST 


VKAB  ON  THIS  ITBM>. 


Figure  22:  The  general  questions  included  here  do  not  vary  a  great 
deal  from  those  in  previous  classifications,  except  that  emphasis  is 
placed  on  salaries  and  the  withdrawals  of  partners.  The  physical  make- 
up of  this  as  well  as  the  other  forms,  however,  is  interesting  because 

56 


LAND  AND  BUILOIHOS: 


{USBD  IN 
OTMBB  • 


BUSINBSS  (. 


TMtiBWlMcMMH 

Olipuliil  V«>n« 

MortoiM 

Immmwmxm 

WmmttU  RM«v«d  Onriac 
LMcriKalYw 

1 

1 

( 

t 

« 

■  T  WHOM  APTRAISBD/. 


ir  BOOK  VALUB  HAS   DBCRBAS8D  OR   INCRBASBD  DURINO  THB  YXAR.  ACCOUNT  POR  SAMK. 


■  AVB  YOU  ANY  LBASKHQLDSJIOT  MSMTIONBD  IN  YOUR  ASSBTS>_ 


.OIVB  OCTAUa. 


OTHKB  ACTtVB  ASSBTSr— lli-f  - 


N«M  WCMcm 

Locttbo* 

PorAdvwcM 

T»-. 

T«-. 

( 

I 

MOTKS  BBCBIVABLB— DUp 


FARTNERS  AND  BUPLOYSBS 


N». 

Aamal 

Time  or 
Drmaod 

Date  ol 
Nott 

D<mDm< 

Islt  ■  Rtarwi 
Whole  Of  1 

1  Eilher  la 
a  Part/ 

8 

k  It 
■ciiratf' 

Ho«r 

t 

(  nWM  PARTNBRS  AND    BMPLOYKBS. 

~ 

N«. 

AaoMit 

Omc 

o*uo« 

ta  II 

Ho«r 

AccsM 

1  Ripriiftt  Wb«t> 

1 

DETAILS  RELATIVE  TO  UABIUTIES 

MOTSS  PAYABLB— NAMB  YOUR  BANKS  AND  BROKIBS  AND   UNB  WITH  BACH: 


WMAT  TIMB  OP  THB  YBAR  DO  YOU  BORROW  OPJTOUR  BANKS?  . 


.TMROUQH  BROKBRS?. 


STATB  MAXIMUM  AMOUNT  BORROWKO  PROM  ALL  SOURCXS  DURINO  FISCAL  YBAR  JUST  CLOSBD  I 

DO  TOUR  BRANCMBS  OR  ALLIBO  CONCBRNS  BORROW  LOCAIXV  • WHKXU 

DO  YOU  BORROW  CONTINUOUSLY  IN  OPBN  MAXKBT? POR  MBRCHANDUXr. 

OTHXRWtSK? AMOUNT  OP  YOUR  NOTBS  PAYABLB  SBCURBD  BY  COUATSRALl  %  ■ 


OBSCBIBB  THB  COLLATKRAL. 


ACCOUNTS  PAYAPI  S— WMATJUUtJfOU«.AVBRAOB  TBRMS  OP  PURCHASK?- 
OO  YOU  DISCOUNT* ANTICIPATB? 


JfAMB  A  PXW  CONCBRNS  PROM  WHOM 


YOU  PURCHASB   IN   LAROB  QUANTITIBS:. 


of  the  way  some  of  the  questions  are  boxed  off  to  make  the  contents 
easy  to  read.  Note,  for  instance,  how  columns  are  provided  to  set  off 
some  of  the  information  conveniently.  This  arrangement,  of  course, 
helps  the  customer  to  list  his  finances  easily  without  getting  confused. 

57  i 


*i)l 


i 

I 


mmatMWUtat> 

KATm  PBK  r^trr  PAiTu 

rBATTmi.  MiiMiniflll — to  wQil> 

'nitiM  flr  rAvtni^> 

OM  WMAT  Ammn  a  t.iSM> 

liBAMn  AHi  Tov  UMim  Airr  Mwyy***                            anuT  ABs  Tm  TKRMi  np  Tin  Lm/iia» 

• 

• 

llWIilllllll     IJil  MKIK*ll>AinM>B  f 

MISCCLLAMCOUS 
cmwan  %                          UABii.rrv  f 

Lm  * 

MDOIIW »— WHAT,  m  VOVR  OriMIOM. 

N«M>  W  OMwal  Pw<Mt> 

««». 

^MMAs#  MM  vVflrtk 

■■■ll«#»nrl«IPWiil 

iWMM. 

AflMual  C«»lrtWt«4 

ObH 

COMMBCTlOMmOr  BACH  »*«TMB«  IM  OTKBa  MinMBM.  V  AWT. 


onrx  OATS  or  ommmuation  or  namnMun*^ 


ma  cm  tbaii  ■BcsivAM.n  oxifBaAU.Y  HAXianni 

TUn  or  TBAII  MiaCMAMOiaK  OBMSNAIXV  MAXIMVn* 

RATS  OaOH  tALSa  POR  TKB  PAST  TWKS  YSAK*— 1« (_ 

MMUUI  n  TOOK  PKiMCiPAL  %tcLas  TBaarroBYr 


.OATm  or  BXPnATMM. 

iciitntoM___ 


JMnmttnt. 


.!• 1. 


-It •. 


■A«B  IBBM  AUXHTBO  BY  A  CBXTimO  PVBUC  ACCOUMTAirr,  OIVB  liAta  OT  ACOOUMTAItr  AMD  BATB 

or  AUBIT , 

ABB  TNBBB  AMY  JOOaMBim  UNBATHPIBO.  OK  «UIT«  PBNOiMO  AOAUMT  tOim  mM  OK  ANY 

roK  w«AX  AMOOirrr 


r,   AMD 


OIVB  DAYS  YOU  BBOULAKLY  TAKB  IMVBMTOKY  AMD  C>.aaB  YOUK  BOOKa  . 


I  m*  nrOlt  IkM.i 


Fimi  NAIIB. 


BATB  nOMBBu 


7ica- 


I  aflMikMk  lai 


Figure  22:  Convenient  arrangement  is  made  on  this  page  for  register* 
ing  the  names  of  the  general  and  special  partners  of  the  concern. 
This  immediately  conveys  a  concrete  impression  of  the  personnel  of 
the  firm— an  important  factor  for  banks  to  know  in  extending  credit. 

58 


CLASSIFYING  THE  RISKS 


59 


Similarly,  in  many  other  ways  a  classification  of 
this  sort  helps  the  banker  to  "keep  his  ear  to  the 
ground"  regarding  the  safety  of  all  risks. 

Wise  classifications  make  it  easier,  too,  for  the 
bank  to  extend  the  right  sort  of  cooperation  to  cus- 
tomers. For  instance,  one  bank  which  has  an  auxiliary 
record  to  show  the  date  borrowers  close  their  books 
as  illustrated  in  Chapter  I,  found  it  easy  one  year  to 
send  out  cards  (Figure  23),  reminding  customers  to 
make  adequate  provision  for  their  income  tax.  These 
cards  were  inexpensive  and  cost  no  postage  as  one 
was  enclosed  in  each  monthly  statement  envelop. 

Consider,  too,  what  cooperation  Uke  this  means  to 
the  credit  department.  In  this  instance  alone,  sending 
out  the  cards  at  just  the  right  time  awakened  a 
number  of  customers  to  the  necessity  of  planning  ahead 
for  this  tax.  The  responses  to  the  questions  asked  were 
prompt  and  frank  and  the  credit  department  received 
additional  helpful  information  on  the  condition  of  a 
great  many  customers.  The  influence  of  cooperation 
of  this  sort  can  hardly  be  overestimated.  In  the  one 
bank  the  growth  of  business  has  been  constant  in  the 
face  of  strong  competition  and  much  of  that  growth 
is  due  to  the  way  the  credit  department  compiles  and 
classifies  its  records  and  keeps  in  touch  with  customers 
in  ways  like  those  just  described. 

Besides  the  groupings  aheady  described,  all  loans, 
of  course,  should  be  classified  according  to  their 
character,  whether  secured  or  unsecured,  whether 
farm  loans  or  city  real  estate  loans,  and  so  on.  Here 
again  the  plans  of  different  banks  vary  considerably. 
However,  one  illustration  (Figure  24)  will  show  a 
convenient  method  for  filing  the  information  on  real 
estate  loans,  particularly  the  facts  regarding  property 
abstracts,  and  will  no  doubt  suggest  ideas  for  making 
classifications  of  this  sort  more  complete,  to  the 
benefit  of  the  credit  department. 


. 


I 


FOR  SPECIAL  ATTENTIOM 

Hhen  you  closed  your  books  on  December  31.   1917, 
did  you  make  provision  by  setting  up  a  reserve 
account  for  the  1917  income  tax  which  must  bo 
paid  June  15.  1918? 

If  not.  what  amount  do  you  estimate  this  tax  to 
be.  and  what  provision,   if  any.  have  you  made 
for  meeting  the  payment  when  due.  either  by  pur- 
chase of  Government  short  term  notes,  or  setting 
aside  funds  for  that  use? 


Figure  23:  Here's  an  example  of  how  one  bank  cooperates  with  its 
customers.  The  timely  notice  brought  the  bank  a  great  deal  of  valuable 
credit  information,  and  customers  appreciated  the  reminder  it  carried. 


LOAN  NUMBER 

• 

Maker 

Location 

Abstract  from                    To 

19 

From 

To 

19 

BOOK                               To 

19 

To- 

19 

PIECE                              To 

19 

To 

19 

To 

19 

To 

19 

Owner's  Policy  Number 

Number 

Loaned  To 

Address 

Phone 

Loaned 



Wrote  No.  1    19    No.  2    19     No.  3    19 

No.  4    19 

No.1    19 

No.  2    19 

No.  3    19    No.  4    19 

Extension 

Returned                                                                 ^ 

Loan  Paid 

. 

1                                    1 

_ — . -v.^ 

Remarlcs 

Figure  24:  This  record  card  in  use  by  one  bank  which  handles  many 
real  estate  loans,  conveniently  tabs  all  the  important  information  re- 
ceived covering  the  abstracts  for  each  piece  of  property  involved, 

60 


CLASSIFYING  THE  KICKS 


61 


This  card,  which  has  stood  the  test  of  practicality  in 
one  bank,  is  5  by  8  inches  in  size,  and  provides  sufficient 
space  for  a  complete  history  of  the  abstracts  for  each 
loan.  Reference  to  the  record  is  made  easy  by  identi- 
fying it  at  the  top  with  the  loan  number.  Then  follow 
the  various  items  of  information:  the  name  of  the 
maker,  the  location  of  the  property,  and  all  the  facts 
about  the  abstracts.  Other  items  are  included  as 
shown  on  the  form,  which  is  filed  numerically  accord- 
ing to  the  loan  number.  A  classification  of  this  sort 
is  especially  desirable  for  a  bank  which  makes  a  specialty 
of  real  estate  loans.  It  helps  the  credit  department 
to  watch  the  status  of  the  property  behind  each  risk, 
and  assures  it  that  the  title  in  each  instance  is  clear. 


THIS  METHOD  OF  HANDLING  INSURANCE  RECORDS 
HAS  ELIMINATED  GUESSWORK  FOR  ONE  BANK 

In  handling  real  estate  loans,  too,  it  is  important  to 
have  a  definite  check  on  all  insurance  policies  covering 
the  risks.  The  bank  wants  to  know  that  this  insurance 
is  constantly  in  force.  Therefore,  that  there  may  be 
no  guessing,  one  credit  manager  keeps  an  insurance 
record  in  looseleaf  form  (Figure  25).  These  details 
are  classified  according  to  the  nimiber  of  each  loan. 
Thus,  when  any  question  about  insurance  only  comes 
up  regarding  a  risk,  the  bank  officers  can  quickly 
refer  to  this  one  record.  It  makes  a  convenient  classi- 
fication imder  the  heading  *  insurance''  of  all  loans 
carried  by  the  bank. 

Some  banks  also  distinguish  between  straight  prom- 
issory notes  and  those  bearing  indorsements,  filing 
each  class  separately  in  order  to  keep  closer  track  of 
all  indorsed  paper.  This,  of  course,  is  merely  sugges- 
tive, for  each  bank  obviously  has  to  make  its  records 
fit  its  own  needs.  The  main  point,  of  course,  is  to 
have  the  classifications  practical  and  suited  to  the 
types  of  loans  handled. 


1  '\ 


■   ^ 
I 


!l 


^Oid^ 


tJmtountAiit/eSistS 


jm^i»it»m. 


cwcwu*  icrrtH  oroitBrr. 


u4aL^ 


or  CMiCAao 


Mm£m£a0'J^^f^Ji>f<4Ufd\  I  ^^9^1^ 


-wtfL 


XJ^Jm!Hlof,%i^tmJuiimm^ 


^J!i:M^, 


The  lUnoMAk  Bank  omi^c  RcmkiO 


Figure  26:  This  letter  of  credit  has  been  used  with  unusual  success 
by  one  bank.  The  inside  pages  are  headed  as  shown  in  the  upper 
sheet,  so  that  all  accounts  paid  can  be  listed  both  in  letters  and  figures 
and  the  name  of  the  paying  bank  officially  recorded  in  each  instance. 

62 


Buildlno  Loan  ?_ 

MSURANCE  MEMORANO 

Amnunt    < 

UM 
Loan  No. 

19 

NflfltA 

Locati'^n 

ImnrnvAmnnt!! 

Amount  of  Insuraii 

Checks  on 
Reports 

Boiler  Insurance  . 

ice  $. 

nrriflffid 
ft 

191        $ 
_19L.*  $ 
191        $ 
191        $ 
191        $ 
191        $ 
191        $ 
191        $ 
191        $ 
Leasehold. 

.with 

» 
ft 
»t 
tt 
f» 
»» 
ft 

Fee 

ff 

ff 

f» 

t> 

f» 

«t 

•• 

Plate  Glass  Insurance 

Figure  25:  Here  is  a  convenient  card  classification  of  insurance 
carried  on  building  loans.  Filed  by  number,  these  brief  records  afford 
the  credit  manager  quick  access  to  essential  insurance  information. 


c&ijr<Muru>— 01 


OMn.a  AjR.r.  Tr.  A  ■»*■  _ 
Hoa.  Ixrlais  Buk  tt  U 
.  Buk  a(  Km.- 
^.ntrml  Nuletwl 
I  Puk  Butk. 
.  »t  P«l«  Alia 
BMk  oc  ~ 
.k  of  FoB.ak. 


lit!  of  OMnraqpondcats 
of 

The  National  Bank 
of  the  Republic 


Figure  27:  Here  you  have  the  supplementary  docimient  to  Figure  26. 
This  booklet  serves  as  an  introduction  card  and  contains  a  list  of  corre- 
spondent banks  where  payments  on  the  letter  of  credit  may  be  obtained. 

63 


64 


TESTED  CREDIT  METHODS 


While  on  this  subject  of  classifying  risks,  it  may 
be  well  to  consider  for  a  moment  a  somewhat  different 
type  of  credit.  A  great  many  banks  specialize  in 
letters  of  credit  and  a  brief  mention  here  of  how  they 
are  handled  may  suggest  to  bankers  ways  to  widen 
the  scope  of  their  activities. 

Protection  and  flexibility  are  most  essential  in  han- 
dling letters  of  credit.  By  adopting  a  method,  like 
that  to  be  described,  a  middle-western  national  bank 
has  eliminated  the  danger  of  loss  or  forgery,  that 
usually  accompanies  old-fashioned  practices.  At  the 
same  time  it  has  been  able  to  furnish  the  customer 
with  credentials  that  are  easily  negotiable. 

When  a  letter  of  credit  is  apphed  for  at  this  bank, 
a  circular  like  that  shown  in  Figure  26  is  issued.  The 
face  of  this  circular  serves  to  introduce  the  buyer  of 
the  letter  and  it  also  authorizes  the  payments  of 
drafts  to  the  holder  according  to  the  amounts  specified. 
For  identification  purposes  and  convenience,  the  holder 
of  the  credit  letter  is  given  a  book  containing  a  Ust  of 
the  bank's  correspondents  (Figiu-e  27).  On  the  inside 
of  the  front  cover  is  an  introduction  card  bearing  the 
holder's  signature. 

Usually,  the  holder  of  a  letter  of  credit  finds  it 
difficult  to  check  up  the  payments,  especially  if  he  is 
traveling  in  foreign  countries  where  the  money  stand- 
ards are  different.  But  with  this  circular,  he  always 
has  a  definite  record  of  just  how  he  stands.  The  bank, 
too,  insures  itself  against  mistakes  or  misunderstand- 
ings by  explaining  definitely  in  the  letter  just  what 
procedure  the  paying  banks  are  to  take  to  reimburse 
their  cash.  In  fact,  by  classifying  this  branch  of  the 
work  properly  it  is  handled  much  easier. 

Investigation  indicates  that  many  ideas  for  classi- 
fying risks  are  of  proved  value.  It  doesn't  matter 
then,  usually,  so  much  what  the  exact  plan  is  if  it  is 
adequate  to  meet  the  needs  of  the  bank. 


CHAPTER  V 
GATHERING  CREDIT  INFORMATION 

IN  order  to  obtain  outside  corroborative  credit  infor- 
mation as  a  precaution  in  checking  up  the  results  of 
its  own  investigations  of  applicants  for  credit,  it  is 
necessary  for  every  bank  to  keep  a  credit  file  right 
up  to  the  minute,  as  outlined  in  Chapter  XIV,  and  to 
maintain  close  contact  with  the  different  commercial 
agencies  and  similar  sources  of  help.  Many  banks 
also  employ  outside  investigators  for  the  purpose  of 
running  down  inquiries.  These  investigators  represent 
one  of  the  strongest  forces  in  the  regulation  of  bank 
credits,  since  they  are  usually  able  to  get  information 
of  a  character  that  is  very  valuable  in  determining 
the  risk.  Then,  the  service  of  clipping  bureaus  often 
provides  the  credit  department  with  material  that  is 
helpful  in  passing  upon  loan  appUcations,  especially 
open  market  offerings. 

Not  long  ago  a  pubUshing  concern  apphed  to  its 
bank  for  an  increased  fine  of  credit.  Reference  to  the 
statements  on  file  indicated  that  the  concern  was  in 
good  condition  and  ordinarily  would  have  been  entitled 
to  more  money.  The  bank  learned,  however,  that  the 
concern  really  controlled  six  subsidiary  pubUshing 
firms  and  they  were  interlocked  in  such  a  way  that 
naturally  it  was  difficult  to  find  out  just  where  the 
identity  of  one  commenced  and  the  other  left  off. 
Furthermore,  all  of  these  different  establishments  were 
located  on  the  same  floor  of  a  big  office  building  and 
while    they   were    separate    and    distinct    businesses 

65 


66 


TESTED  CREDIT  METHODS 


'    1 


ostensibly,  they  were  in  reality  controlled  by  the 
same  group  of  men. 

When  the  bank  learned  this  state  of  affairs  the  com- 
mercial agencies  were  called  on  for  detailed  informa- 
tion. The  general  reports  usually  furnished  were  not 
sufficient.  The  agencies  sent  out  special  reporters  to 
determine  exactly  the  status  of  the  company,  but  even 
their  reports  did  not  clearly  indicate  all  the  ramifica- 
tions of  the  business.  The  bank  then  decided  to  put 
its  own  outside  investigator  on  the  job.  Before  he 
went  out,  the  credit  manager  gave  him  definite  instruc- 
tions for  digging  out  the  facts,  especially  for  finding 
out  whether  or  not  there  was  any  shifting  of  earnings 
from  one  subsidiary  to  another.  Briefly,  the  credit 
department  wanted  to  know  just  which  sections  were 
a  source  of  profit  and  which  were  causing  a  loss,  if  any. 

After  spending  three  days  looking  over  the  concern's 
accounts,  the  investigator  found  that  one  division  of 
the  business,  which  made  considerable  money,  was 
carrying  along  the  losses  sustained  by  some  of  the 
others.  He  also  noted  that  these  losses  had  been 
growing  from  month  to  month  and  might  ultimately 
imdermine  the  strength  of  the  prosperous  division. 
None  of  this  information,  however,  appeared  on  the 
customer's  financial  statement  and  it  was  not  volun- 
teered to  the  bank  when  the  apphcation  was  presented 
for  the  increased  line.  Obviously,  the  bank  knew 
nothing  of  this  serious  leak  in  the  profits  until  the 
investigator  brought  the  facts  to  light  and  enabled 
the  credit  department  to  complete  its  analysis. 

Then  the  credit  oflBcer  sent  for  the  chief  executive 
of  the  concern  and  asked  him  for  an  explanation.  He 
admitted  that  he  had  been  speculating  on  the  weaker 
branches  of  the  business  and  had  been  using  the  money 
which  the  bank  had  advanced  on  the  strength  of  his 
statement  and  previous  representations  in  the  hope  of 
developing  them.     The  bank  oflGicers  explained  that 


RETAIN  THIS  FOR  YOUR  FILES 

Qttcago.  IlL 

We  Kive  you  bdow  OUR  EXPERIENCE  with 

Nunei 


.19..i» 


.BusineM. 


From  ytbom  we  have. 


order  for  $. 


(Indicate  whether  flnt  ord«r) 

mMEcamnEi  MroMMTioM  tmcTLY  coNraoinAL 
Yours  truly. 


Approved  and  Adopted  by 

NATIONAL  ASSOCIATION 

OF  CREDIT  MEN 


BRADNER  SMITH  AND  COMPANY 


To. 


Sold  £Rom. 


.To 


Terms. 


Highest  recent  cr^t  $. 

On  open  account     $. 
On  notes  $. 


Owing  now 

Not  due 


MANNER   OF  PAYMENT 
ANSWER-YES  OR   NO 


Owing  now    ^  On  open  account     $. 

Past  due       «  ^^      ^ 
On  notes 


Other  information. 


Discounts 


Prompt  and  satisfactory 


Slow  but  considered  good 


Slow  and  unsatisfactory 


Account  secured 


Notes  secured 


Notes  paid  at  maturity 


Notes  renewed  in  full 


Notes  renewed  in  part 


Makes  unjust  claims 


Collected  by  attorney 


Figxire  28:  This  form  for  furnishing  credit  information,  which  has 
been  approved  by  the  National  Association  of  Credit  Men,  indicates 
one  method  of  gathering  information.  It  also  suggests  what  questions 
bankers  may  be  called  upon  to  answer  when  giving  facts  of  this  sort. 

67 


M 


u 


I- 


68 


TESTED  CREDIT  METHODS 


they  could  not  risk  their  funds  on  such  a  hazard  and 
pointed  out  to  him  the  mistake  he  was  making.  He 
saw  the  effects  of  his  overambition  and  quickly  read- 
justed his  methods  to  conform  to  the  requirements. 

This  is  one  of  many  similar  instances  showing  how 
the  outside  investigator  is  able  to  fiu*nish  the  credit 
department  with  important  facts  in  relation  to  a  risk 
which  may  prove  dangerous  unless  the  bank  goes 
beyond  the  figures  as  they  appear  in  the  comparative 
statements.  And  it  doesn't  necessarily  mean  that 
only  a  large  bank  can  afford  this  service.  Even  the 
small  bank  can  learn  the  facts  which  are  essential  to 
safeguarding  its  interests. 

IN  THIS  INSTANCE  A  THOROUGH  ANALYSIS  OF  THE  STATE- 
MENT PREVENTED  SUBSEQUENT  COMPLICATIONS 

Shortly  after  the  income  tax  law  became  effective, 
a  manufacturer  of  metal  goods  filed  a^  statement  of 
his  financial  condition  and  when  it  was  turned  over  to 
the  credit  department  for  analysis,  a  sharp  decrease  in 
net  worth  was  xmcovered.  As  the  various  items  on 
the  comparative  statement  were  balanced  one  against 
the  other  over  a  period  of  years,  the  latest  statement 
showed  evidences  of  manipulation. 

The  outside  investigator  was  sent  to  the  customer's 
plant  with  instructions  to  make  a  survey  of  the 
business  for  the  past  year.  As  was  usually  his  line  of 
action,  the  investigator  did  not  attempt  a  detailed 
audit  but  endeavored  rather  to  look  over  the  stock, 
prove  up  the  condition  of  the  trade,  and  gather  other 
pertinent  information  of  a  general  character. 

While  he  was  at  the  plant,  the  manuf  actm-er  hastened 
to  the  bank  and  sought  out  the  credit  manager. 

*'Whey  did  you  send  an  investigator  to  my  plant?" 
he  asked,  half  angrily,  half  like  a  boy  whose  pride  has 
been  wounded.  And,  without  giving  the  other  man  a 
chance  to  answer,  he  launched  forth  a  violent  protest 


I 


HOW  TO  GATHER  CREDIT  FACTS  69 

against  the  bank's  action.    "IVe  been  a  good  customer 
of  this  bank  and  I'll  not  be  watched  like  a  criminal, 
he  said,  emphasizing  his  words  by  pounding  on  the 
top  of  the  mahogany  desk. 

In  the  midst  of  this  tirade  the  investigator  walked 
in  and  reported  there  was  nothing  to  indicate  a  reduc- 
tion in  the  concern's  net  worth  and  that  there  must 
be  some  mistake  in  the  last  statement.  Cakned  by 
this  unexpected  interruption  the  manufacturer  changed 
his  attitude  and  confessed  that  he  had  purposely  made 
an  artful  error  in  the  statement. 

'*That  was  a  copy  of  the  statement  I  subnutted  to 
the  government,"  he  explained,  "and  I  left  it  the  same 
for  you  so  if  it  were  checked  up  at  any  time  it  would 
show  no  discrepancies."  ,.    u     i 

The  head  of  the  credit  department  m  this  bank 
relates  that  investigators  have  found  other  instances  of 
business  men  who  have  been  tempted  to  alter  their 
statements  to  avoid  excess  taxes.  It  is  just  this  sort 
of  error  that  the  outside  investigator  often  uncovers. 

Next  to  the  files  and  the  bank's  outside  mvestigators, 
the  conmiercial  credit  agencies  offer  banks  effective  ^ 
assistance  in  developing  credit  information.  The  de- 
tailed reports  of  local  agencies,  supplemented  by  the 
general  data  from  the  national  agencies  or  the  exclusive 
trade  agencies,  usually  form  an  avenue  of  approach 
which  makes  it  comparatively  easy  to  find  out  the 
actual  condition  of  the  borrower. 

A  middle-western  national  bank  endeavors,  through 
a  local  agency,  to  keep  a  line  on  all  court  and  real 
estate  transactions  relating  to  its  customers.  I'or 
instance,  when  the  credit  department  found  that 
the  checking  balance  of  a  manufacturing  concern 
was  decreasing  by  leaps  and  bounds,  it  immediately 
wanted  to  know  why.  A  prelmiinary  inquiry  showed 
that  the  raw  material  market  of  this  manufacturer 
was  not  m  a  condition  at  this  particular  tune  to 


pin 


70 


TESTED  CREDIT  METHODS 


invite  heavy  buying.  Yet  he  had  drawn  his  full 
line  of  credit  amounting  to  $60,000  and  his  account 
indicated  that  he  might  be  in  need  of  more  funds 
in  a  short  time.  What  was  he  doing  with  the  money? 
The  bank's  credit  man  asked  the  local  agency  for 
a  report.  The  answer  to  the  puzzle  was  quickly 
forthcoming.  The  agency  repHed  that  the  manu- 
facturer was  dabbhng  heavily  in  a  real  estate  subdivi- 
sion and  that  he  was  the  defendant  in  two  judgment 
cases  arising  from  disagreements  over  purchases  of 
property  which  he  had  made.  A  report  Uke  this 
necessitated  quick  action.  The  manufacturer  was 
called  in  and  confronted  with  the  facts.  He,  of  course, 
had  no  defense.  He  admitted  that  he  had  been  di- 
verting his  attention  and  his  money  from  his  business 
in  order  to  speculate  in  real  estate.  Gettmg  the 
outside  information  immediately  on  discovering  weak 
points  in  this  account,  the  bank  was  able  to  take  the 
proper  steps  to  protect  its  interests. 

Thus,  a  careful  check  of  customers'  credits  through 
the  agencies  may  often  be  of  great  value  to  a  bank, 
for  it  may  show  that  a  borrower  is  devoting  too  much 
attention  and  spending  too  much  money  on  a  side 
line,  or  that  he  is  manipulating  his  finances  in  some 
other  way,  to  the  detriment  of  his  line  of  credit,  which 
is  granted  solely  to  supply  temporary  needs  in  a  sound 
and  growing  business.  Sometunes  careful  observation 
by  the  bank's  officers  will  detect  practices  of  this 
character,  but  usually  the  safest  way  to  keep  a  definite 
check  on  this  tendency  is  to  secure  agency  reports,  as 
in  the  instance  just  described. 

It  is  essential  for  a  bank  to  have  outside  service  of 
this  sort  when  buying  commercial  paper  on  the  open 
market.  In  its  own  community  the  bank  may  have 
very  httle  difficulty  in  checking  up  the  paper  offerings 
of  local  concerns,  but  m  determining  the  worth  of 
paper  placed  on  the  market  by  outside  concerns,  it 


Paper  Trades  Bureau 
Inquiry  Ticket 

THE  CREDIT  CLEARING  HOUSE 

Members  in  more  than  three  hundred  cities 


PtoMt  furmsh  us  in  confWwct.wlth  thi  txperiwe.  of  in«nbtr«.  as  ts  th.  commtreW  stwHii  of 

DATE_- — 

NAME.^ — ' 

ADDRESS • 


Also  trading  as — 


Sold. 


_to. 


.19- 


I  Order  Unfilled  $. 


LENGTH  OF  TIME 


Terms. 


Highest  credit 

Manner  of  Payment 
Discounts — 


r NOTES  $. 


Amount  Owing  |^^„^  , 


Prompt 

Slow 


Past  Due  $. 

Notes 

DUE  AS  FOLLOWS 


[MOTES  AND  ACCOUNTS) 

Open  Account 

BOUGHT  AS  FOLLOWS 


Pays  notes__ — 

Pays  drafts  when  made- 
Collected  by  attorney — 
Uncollected  old  account. 


SEE  REMARKS 


Jan.  $. 
Feb.  $_ 
Mar.  $- 
April  $- 
May  $- 

June  $. 

July  $. 

Aug.  $- 


Jan.  $_ 

Feb.  $_ 

Mar.  $_ 

April  $- 

May  $_ 

June  $- 

July  $- 

Aug.  $- 

Sept.  $. 

Oct.  $. 

Nov.  $. 

Dec.  $• 


CHICAGO   DIST. 
NO 153-Y     


I 


GIVE  NAMES  OF  FIRMS  KNOWN  TO  SE  SELLING 


Figure  29:  This  well-arranged  form  for  obtaining  credrt  facts  about 
bZe»  concern,  from  member,  of  the  credit  clear.ng  house  d^ffe« 
.omewhat  from  the  ticket  shown  in  Figure  28.  It  3'  ^*° J'^^'' 
«,me   of   the    information    credit    men  consider  essentml  to  know. 

71 


i 


!  -f 


t 


il 


w 


72 


TESTED  CREDIT  METHODS 


will  find  the  agency's  examination  important  and 
valuable—m  fact,  often  indispensable. 

A  middle-western  bank,  like  many  other  banks 
receives  reports  daily  on  the  condition  of  business 
concerns.    These  reports  are  sunMnarized  in  this  way: 

Simmons  Manufacturing  Company,  Canajoharie,  New  York» 

S^Tof^  .nrT"''-^  Massachusetts  corporation,  paid  in  capital 
5-00  000,  surplus  and  mdividual  profit  $115,000.  Statement  June 
30  shows  quick  $205,000;  debt  $35,000.  Fair  progress.  Not^ 
offered  straight  and  considered  good  investment,  though  not  con- 
sidered  prime  m  view  of  lukewarm  checkings  received. 

A  statement  relating  briefly  to  another  company 
will  illustrate  the  value  of  this  credit  exchange: 

This  concern  enjoys  the  confidence  of  the  trade  and  is  payine 
its  biUs  promptly,  although  recent  statement  shows  heavy  debt 
and  does  not  mdicate  much  progress. 

As  soon  as  the  bank  receives  these  daily  reports 
they  go  to  the  credit  desk  where  the  credit  manager 
makes  a  digest  of  them  for  practical  reference.  If  the 
bank  is  buying  the  paper  of  any  of  the  houses  on  which 
reports  are  received,  from  the  information  thus  gained 
It  can  teU  at  a  glance  in  comparison  with  its  own  rec- 
ords exactly  how  the  concern  stands. 

Sometimes  additional  information  is  secured  for  the 
files  by  sending  out  form  letters.  To  do  this  wisely 
however,  requires  extraordinary  tact.  Unless  the  bank 
prepares  the  letter  most  carefully,  it  is  likely  to  give 
to  the  recipient  the  impression  that  the  bank  is  doubtful 
about  the  subject  of  the  inquiry  as  a  risk  when  in 
reahty  It  is  seekmg  only  to  keep  its  files  up  to  date  and 
properly  checked.  To  guard  against  such  a  mis- 
understanding,  a  national  bank  always  inserts  in 
every  letter  sent  out,  the  following  sentence: 

''This  inquiry  is  made  in  connection  with  the  revi- 
sion  of  our  files  and  we  wish  to  assure  you  that  it  does 
not  mdicate  anything  unusual  or  unfavorable  '* 


HOW  TO  GATHER  CREDIT  FACTS 


73 


A  tactful  precaution  like  this  offers  the  bank  a 
defense  should  a  customer  find  out  that  his  credit  is 
being  investigated  in  the  trade  and  come  in  to 
protest  against  it. 

When  the  head  of  an  engraving  house  learned  that 
his  bank  was  sending  out  letters  to  find  out  about  his 
credit,  he  immediately  called  to  find  out  the  reason. 
He  protested  that  the  inquiry  would  hurt  his  standing 
among  the  supply  houses. 

THIS  INCIDENT  SHOWS  HOW  A  BANKER  HANDLED  AN  EMBARRAS- 
SING SITUATION  AND  MADE  A  FRIEND 

'* Before  going  into  this,  I  want  to  ask  you,"  said 
the  credit  officer,  "whether  you  have  anything  at  all 
you  wish  to  conceal  from  us  regarding  your  financial 
condition?*' 

*'I  should  say  not,"  repUed  the  customer,  still 
somewhat  indignant. 

''Then,  wouldn't  you  feel  justly  proud,  if  all  of  yoiu- 
suppliers,  who  have  been  cooperating  with  us  in 
proving  up  our  files  for  every  customer,  wrote  us 
highly  complimentary  reports  of  your  business?" 

The  visitor  assented. 

The  banker  rang  and  had  the  customer's  folder 
brought  in.     From  it  he  took  four  letters. 

*'  Look  at  these,"  he  said,  as  he  handed  the  suppliers' 
letters  over  to  his  business  guest. 

The  customer  read  each  one  eagerly,  gave  them 
back  ahnost  tenderly,  and  smiled.  Every  one  of  the 
reports  placed  him  in  the  preferred  class  of  desirable 
credit  risks  and  complimented  his  business  ability. 
He,  of  course,  was  pleased,  and  quickly  saw  that  the 
bank's  method  of  check-up  could  do  a  good  credit 
risk  no  possible  harm. 

So  tactfully  had  the  banker  handled  the  whole 
situation  that  the  customer  voluntarily  offered  to 
furnish  the  names  of  other  concerns  which  would 


74 


TESTED  CREDIT  METHODS 


I 


be  helpful  in  supplying  the  bank  with  the  credit  infor- 
mation. Some  bankers,  however,  do  not  favor  the 
use  of  form  letters  for  this  purpose.  The  reasons  are 
taken  up  in  Chapter  XIII. 

Still  another  way  in  which  the  bank  gathers  its 
credit  information  is  to  watch  the  indorsements  on 
the  back  of  the  checks  of  its  customers. 

When  a  borrower's  balance  shows  a  decrease,  it  is 
easy  to  look  over  his  checks  and  find  out  where  he  is 
spending  his  money.  Sometimes,  of  course,  the 
customer  may  so  draw  his  checks  that  their  real 
purpose  is  covered  up,  as,  for  example,  drawing  a 
large  personal  check.  On  the  whole,  however,  the 
indorsements  may  be  rehed  upon  to  show  how  the 
customer  is  paying  his  bills  and  this,  if  nothing  else, 
is  a  good  barometer  of  the  condition  of  his  business. 

Bankers  and  business  men  sometimes  try  to  secure 
credit  information  over  the  telephone.  As  a  rule,  this 
is  bad  practice  from  every  standpoint,  especially  if  you 
are  not  positive  who  is  at  the  other  end  of  the  wire. 
To  be  guided  solely  by  the  sound  of  a  voice  is  taking 
a  chance  that  might  lead  to  the  violation  of  a  business 
confidence.  Usually  it  is  considered  good  policy  to 
have  all  credit  information  in  writing. 

It  has  not  been  the  purpose  of  this  chapter  to 
cover  all  phases  of  gathering  credit  information. 
There  are  some  which  are  dependent  on  reciprocal 
exchange  methods,  to  be  described  in  Chapter  XIII. 
However,  we  have  shown  a  number  of  the  ways  in 
which  bankers  widen  the  scope  of  their  credit  activities 
to  make  lending  to  borrowers  more  safe  and  profitable. 
And  this,  of  course,  is  the  chief  reason  for  perfecting 
the  machinery  for  gathering  credit  information. 


PARTH 


FINDING  THE  RIGHT 
CREDIT  BASIS 


i.   I 


IN 


CHAPTER  VI 
HOW  TO  ANALYZE  STATEMENTS 

A  MERCHANT  in  the  Northwest  lines  up  his 
assets  and  liabilities  in  the  following  way  for 
the   information   of  his   banker.     Under   the 
heading  of  quick  assets  are  included: 

Merchandise  at  cost,  plus  freight 

Customers'  current  accounts 

Notes  receivable 

Cash  on  hand  and  in  banks 

Total 

Under  a  subheading  of  his  ''assets"  are: 

Store  buildings,  garage  (less  depreciation) 
Real  estate  and  buildings  (less  depreciation) 
Store  fixtures  (less  depreciation) 
Delivery  equipment  (less  depreciation) 
Total 

The  ''Habilities"  include  these  items: 

Accounts  payable 
Notes  payable 
Employees*  deposits 
Total 

The  merchant  also  shows  at  the  bottom  of  the  sheet 
his  capital  and  surplus. 

This  summary  gives  the  bank  the  necessary  infor- 
mation regarding  the  dealer's  business  affairs— plus 
the  knowledge,  gained  by  comparing  it  with  previous 
statements,  that  the  stock  of  merchandise  is  fresh  and 
moving  rapidly,  that  the  accounts  are  in  good,  healthy 

77 


78 


ANALYZING  CREDITS 


General  expenses 

Insurance 

Taxes 

Light 

Heat 

Supplies 

Rent 

Salaries 

Sales  by  departments 

Profits  and  losses 


condition,  and  that  the  business  is  making  a  satis* 
factory  net  profit  on  the  investment. 

In  much  the  same  way,  another  firm  furnishes  its 
bank  with  a  statement  based  on  two-year  figures 
which  are  made  up  in  this  manner: 

Discount  current 

Charges  to  income  by  depart- 
ments on  items  not  included 
in  general  overhead  expenses 

Advertising 

Subscriptions  and  charities 

Collections 

Delivery 

Drayage 

Express 

Freight 

Thus,  the  bank  sees  at  a  glance  the  condition  of 
the  business,  its  profits  and  its  growth.  By  lining  up 
the  assets  and  liabiHties  in  this  way,  the  bank  gains  a 
quick  and  definite  impression  of  the  firm's  affairs. 

It  matters  not  especially  what  sort  of  a  statement 
is  used  so  long  as  it  reveals  in  a  simple  and  direct  way 
the  essential  qualities  of  the  business.  In  all  of  the 
important  particulars  the  form  of  statements  used  by 
various  banks  is  almost  identical.  These  forms  reveal, 
as  we  will  show,  some  of  the  important  points  which 
the  banker  must  know  before  granting  a  loan. 

The  usual  form  of  financial  statement  consists  of  the 
gross  items  of  assets  and  liabilities,  but  the  statement 
is  almost  always  inadequate  and  misinforming  unless 
it  is  backed  up  by  a  thorough  knowledge  of  the  personal 
risk  as  described  in  Chapter  VII, 

Assets  are  divided  into  two  groups:  Quick  and  slow. 
Quick  assets  form  the  basis  of  seciu*ity  behind  all  loans 
made  by  conmiercial  banks.  With  the  retail  and  the 
wholesale  merchant,  for  example,  this  group  consists 
of  accounts  receivable  and  merchandise,  providing,  of 
course,  that  both  are  in  a  healthy  condition. 


HOW  TO  SIZE  UP  STATEMENTS  79 

In  any  of  the  industrial  lines,  bills  receivable,  raw 
materials,  and  marketable  merchandise  usuaUy  make 
up  the  quick  assets.  Where  quick  assets  are  kept  m  a 
live,  healthy  condition,  so  that  they  can  be  regarded 
as  security  for  credit  extended,  and  other  conditions 
in  the  borrower's  business  are  good,  the  banker's 
problem  is  simple.  Even  in  times  of  depression,  good 
"quick"  commercial  assets  can  normally  be  converted 
into  cash  in  a  reasonably  short  time. 

QUICK  ASSETS  VERSUS  SLOW  ASSETS— THEIR  RELATIVE 
IMPORTANCE  IN  ANALYZING  STATEMENTS 

Buildings,  real  estate,  machinery,  and  permanent 
fixtures  are  slow  assets,  and  should  be  considered  only 
as  a  background  for  quick  assets.  It  is  fundamentally 
wrong  for  any  bank,  which  is  required  by  law  to  keep 
its  funds  liquid,  to  lend  on  slow  security  of  this 
character.  In  the  first  place,  its  actual  value  under 
the  hammer  of  a  forced  sale  is  problematical,  even 
while  the  relative  value  of  fixed  assets  to  the  borrower 
may  be  high.  Secondly,  the  bank's  deposits  are 
largely  payable  on  demand  and  they  must  be  safe- 
guarded against  contingencies. 

Slow  assets,  which  are  usually  referred  to  as  the 
investment  item,  represent  one  of  the  most  important 
parts  of  the  statement,  since  they  provide  the  necessary 
machinery  for  production.  A  statement  which  reveals 
a  normal  and  prosperous  condition  should  show  a 
certain  amount  of  capital,  or  net  worth,  as  it  is  com- 
monly known,  left  over  for  investment  in  the  materials 
to  be  sold  or  manufactured  by  the  borrower.  Thus  it 
is  essential  to  find  out  the  relation  of  the  amount  for 
mvestment  to  the  fixed  assets  of  the  plant.  ^  In  fact, 
these  fixed  assets  act  as  a  decisive  factor  in  deter- 
mining the  real  strength  of  a  concern,  and  it  is  in  the 
relation  which  they  bear  to  the  investment  that  this 
is  disclosed.    Because  the  fixed  assets  or  the  invest- 


i-l 


H4 


if 


nWDAIIENTAL  OPERATING  STATEaiENT  MATERIAL  ACCOUNT 
Charges. 

Inventory  (at  beginning  of  aontb). 
Purchases  (during  nonth) . 

Crtdlts. 

Materials  drawn  from  stores. 

(Charged  to  production  direct  or  iadlreci.) 

Balance.  , 

Value  of  inventory 

This  account  can  be  subdivided  in  as  many  accounts  as  necessary, 
according  to  materials  used  and  should  be  a  matter  of  current 
record. 


PAYROLL  ACCOUNT 
Charges. 

Total  monthly  payroll  (direct  and  indirect). 

Credits 

Direct  labor  (charged  tc  manufacturing) . 

Indirect  labor  (charged  to  burden  or  operating  expense). 

Balance. 

Accrued  labor. 


INDIRECT  BURDEN  EXPENSE  ACCOUNT 

CbargM. 

General  indirect  salaries  and  wages. 
General  indirect  material 
General  indirect  burden  expense 
Fixed  indirect  salaries  and  wages. 
Fixed  indirect  material. 
Fixed  indirect  burden  expense. 
Departmental  indirect  salaries  and 
Departmental  indirect  material 
Departmental  indirect  burden  espease. 

Credits. 

Total  burden  expenae  on  monthly  direct  labor  (ooapleted  product 

or  in  process  of  manufacture} . 


MANUFACTURING  OR  OPERATING  ACCOUNT 
Charges. 

Direct  labor. 

Direct  materials. 

Indirect  bnrden  expense  general. 

Indirect  burden  expense  fixed. 

Indirect  burden  expense  departmental 


Figure  30:  One  bank  obtains  valuable  information  for  its  credit 
department  by  calling  for  balance  sheets  from  its  customers.  These 
balance  sheets  are  made  up  similar  to  the  outline  given  on  this  and  the 
following  page.     Note  how  the  items  are  headed  and  subdivided  to 

80 


Credits. 

Finished  product  at  cost. 

Balance. 

Goods  In  process  of  fflanufacturing. 

FINISHED  PRODUCT  ACCOUNT 

Charges . 

Finished  production  at  cost. 

Credits. 

Total  sales  at  cost. 

Balance. 

Value  of  finished  product  on  hand 

SELUNG  EXPENSE  ACCOUNT 
Charges . 

All  expense  incidental  to  marketing  the  product. 

Credits, 

By  charging  the  amount  against  sales. 

;SALES  ACCOUNT 
Charges. 

Sales  at  cost  billed  out 

(credited  to  finished  product  aooou&t). 

Credits.  * 

Sales  at  selling  price. 

Balance. 

Gross  profits. 

Charges. 

Selling  expense. 

Balance. 

Net  profits. 

PROFIT  AND  LOSS  ACCOUNT 
Charges. 

Such  losses  as  have  occurred. 

Credits. 

Net  profits  froa  sales. 

Balance. 

To  surplus  account. 


give  specific  information  on  figures  not  shown  in  detml  on  the  customary 
financial  statement.  All  financial  details  of  interest  to  the  bank  thus 
are  readily  available  down  to  the  totals  for  the  profit  and  loss  account. 
Inside  facts  like  these  help  materially  in  sizing  up  a  borrower's  credit. 

81 


Il't 


Ifl 


82 


ANALYZING  CREDITS 


ment  item  do  not  represent  an  actual  borrowing  value 
does  not  mean  that  they  should  not  receive  thorough 
consideration  in  weighing  the  value  of  the  statement. 
Often  they  represent  the  stability  of  the  borrower. 

The  future  prospects  of  an  applicant's  business  and 
the  effect  general  conditions  have  upon  its  economical 
operation  also  are  subjects  of  inquiry  by  the  bank. 
These  points  are  all  important,  and  the  amount  loaned 
depends  upon  the  actual  facts  obtained  regarding  each 
one.  To  enable  the  bank's  officers  to  have  these 
facts,  special  investigators  for  the  institution  make  a 
complete  report  after  they  have  gone  thoroughly  into 
the  condition  of  the  borrower  business.  The  work 
of  these  investigators  is  described  in  Chapter  V. 

In  almost  every  bank  it  is  customary  now  to  call 
upon  customers  for  a  detailed  balance  sheet,  including 
a  profit  and  loss  account,  like  that  shown  in  Figure  30. 
This  information,  together  with  the  data  kept  in  the 
credit  files  and  that  gathered  by  observation,  furnishes 
the  bank  with  the  necessary  facts  regarding  the  con- 
dition of  the  borrower's  business  affairs,  his  responsi- 
bilities, and  his  possible  needs. 

In  passing  on  the  statement,  many  bankers  find  it 
advisable  to  check  carefully  the  figures  that  are  used 
in  computing  the  value  of  various  new  materials,  the 
goods  in  process,  the  finished  goods,  the  land,  the 
building,  the  machinery,  and  so  on.  One  banker,  for 
example,  discovered  on  a  customer's  statement  an 
item  of  $50,000  covering  the  finished  goods  account. 
Something  about  the  item  aroused  the  banker's 
curiosity  and  he  decided  to  investigate.  He  found 
that  this  item  should  never  have  appeared,  as  it  was 
previously  included  in  the  inventory.  An  inspection 
of  the  goods  in  the  stock  room  showed,  in  the  first 
place,  that  the  figures  were  based  on  a  rough  estimate 
instead  of  on  an  accurate  appraisal  and.  in  the  second 
place,    that    the    merchandise  was    practically  un- 


it 


HOW  TO  SIZE  UP  STATEMENTS 


83 


salable,  because  it  was  made  two  years  before  for  a 
customer  who  was  no  longer  on  the  books.  Thus, 
a  purely  fictitious  value  running  into  large  figures  was 
unearthed  by  the  banker. 

Let  us  examine  the  balance  sheet  more  closely. 
Take,  for  example,  the  item  of  raw  materials.  In  this 
case  a  current  inventory  is  abnost  always  essential. 
Unless  the  business  of  the  borrower  is  equipped  with 
accurate  methods  for  cost  finding,  the  items  ''goods  in 
process"  and  ''finished  goods  on  hand"  are  usually 
difficult  to  obtain.  These  two  items,  however,  involve 
the  used  materials  as  well  as  the  indirect  or  biu-den 
expense.  Thus,  if  they  are  not  properly  distributed 
to  the  goods,  then  the  balance  sheet  is  not  correct. 

It  is  desirable,  therefore,  especially  where  customers 
require  a  large  amoimt  of  money,  for  the  banker  to 
request  a  fundamental  operating  statement  hke  that 
shown  in  Figiu-e  30.     By  using  a  statement  of  this 
sort,  an  eastern  banker  obtains  absolutely  reliable 
data.    One  of  its  main  advantages  is  that  it  makes 
unnecessary  frequent  physical  inventories  because  the 
regular  checking  of  the  current  stock  records  helps  to 
reduce  errors  to  a  minimum.     It  also  provides  the 
banker  with  a  simple  method  of  knowing  the  manu- 
facturing or  operating  account,  the  finished  product 
account,  the  selUng  expense  and  the  sales  account, 
and  finally  the  profit  and  loss.    Thus,  it  is  simple  to 
draw  off  a  subsidiary  statement  that  will  show  the 
gross  profits  imder  a  trading  account  and  the  net  profits 
under  a  turnover  account.    The  necessary  figures  to 
fill  out  the  account  may  be  taken  from  the  operating 
balances  which  appear  monthly.     Armed  with  this 
specific    information,    operating    expenses    may    be 
reduced  and  losses  stopped.     The  seciu-ity  back  of 
the  loan  is  therefore  strengthened. 

The  operating  statement,  as  already  pointed  out, 
furnishes  the  credit  department  with  a  direct  line  on 


Ii'1' 


.V 

i 


84 


ANALYZING  CREDITS 


the  borrower's  condition.  True,  it  is  not  as  simple  as 
the  usual  form  of  statement  which  is  printed  on  a 
single  sheet  to  bring  out  in  a  general  way  a  great  deal 
of  the  information  that  is  required  from  borrowers. 
The  condition  of  the  assets  and  liabilities,  briefly 
tabulated,  is  followed  by  a  concise  statement  of  the 
profit  and  loss  accounts.  Then,  on  the  reverse  side  of 
the  statement,  space  is  provided  for  general  informa- 
tion. Here  it  is  worth  noting  that  the  bank  inquires 
if  the  books  of  the  borrower  are  audited  by  an  outside 
accountant  and  the  date  of  such  an  audit,  if  any. 
This  is  an  increasingly  important  question  among  bank 
credit  men,  which  is  more  fully  treated  in  Chapter  XI. 
As  simple  as  this  statement  appears  to  be,  the  bank 
finds  that  borrowers  are  often  unable  to  fill  it  out 
satisfactorily.  Some  of  the  appUcants  for  credit 
frankly  confess  the  weakness  of  their  accounting  to 
supply  the  required  data;  others  sometimes  take  a 
chance  and  attempt  to  set  up  figures  that  do  not  bear 
up  under  the  acid  test  of  the  credit  manager. 

ONE  BANK  HAS  FOUND  THIS  PLAN  EFFECTIVE  FOR  LOCATING 
DISCREPANCIES  IN  FINANCIAL  STATEMENTS 

When  any  inconsistencies  or  defects  appear  in  the 
statement,  the  applicant  is  called  to  the  bank  and  a 
form  like  that  shown  in  Figure  31  is  handed  to  him 
with  the  request  that  complete  information  be  fur- 
nished. Nine  times  out  of  ten,  the  bank  has  found 
that  this  detailed  statement  cannot  be  satisfactorily 
answered,  and  then  the  bank  investigators  and  auditors 
are  put  to  work  on  the  books  of  the  borrower  to  run 
down  the  defects  and  the  discrepancies.  It  is  true  that 
a  borrower  may  unwittingly  falsify  a  statement  because 
of  his  optimism.  He  may  see  possibiUties  larger  than 
they  really  are,  and  again  he  may  manipulate  figures 
so  as  to  have  his  business  appear  prosperous  when,  as 
a  matter  of  fact,  it  is  not. 


■'1 


L 


Name. 


Statement  of  Operations  foi Months  Ending 


-  $- 


GROSS  SALES        .  .... 

DEDUCTIONS  (Returned  Goods,  Out-Frdi^t)         .         .      

NET  SALES       .  •  •  .....$. 

COST  OF  SALES 

Materials  or  MerchatMliie  •  •  . 

Productive  Labor  •  •  •  •> 

Overhead  Expense  .... 

Total  Cost  of  Sales      .... 

GROSS  PROFIT  ON  SALES  .,  .  . 


-    $. 


r 


i, 


SELLING,  DISTRIBUTING  AND  GENERAL 

SELLING  AND  DlSTRIBirriNQ 

Salaries  and  Commission  1 

Advertising  - 

Traveling 
Miscellaneous 
Total 

GENERAL 

Salaries        •  •  • 

Office  Expense  .  . 

Bad  Accounts  Charged  Off 

Miscellaneous  .  - 

ToUl        -  -  - 


-■*. 


Total  Selling,  Distributing  «nd  General  Expense  .... 

NET  PROFIT  ON  SALES    -  -  -  -  -        .       - 

MISCELLANEOUS  EARNINGS       .  .  .  .       .       . 

PROFIT  FOR MONTHS  -  -  -       -      - 


DIVIDENDS  PAID  .... 

ADDITION   TO  CAPITAL  OR  SURPLUS - 

ANALYSIS  OF  OVERHEAD  EXPENSE 


Non-Productive  Labor. 
Supplies  . 

Depreciation— Buildings 

Depreciation— Machinery.. 
Ixuurance      .  . 

Taxes  .  - 

Mtscellaneous  . 

Total  Overhead  Expense 


-   $ 


Vo         - 
-%      - 


Figure  31 :  ?^o  customers  who  do  not  offer  a  complete  statement,  one 
bank  sends  this  auxiliary  blank  to  fill  in.  Many  times,  because  of 
inadequate  accounting  methods  a  firm  is  imable  to  fill  this  out  fully, 
thus  giving  the  banker  an  opportunity  to  recommend  improvements. 

85 


m- 


86 


ANALYZING  CREDITS 


The  chart  (Insert  V)  used  by  the  credit  department 
of  a  middle-western  bank  to  analyze  the  statements  of 
business  men,  illustrates  the  actual  value  of  the  state- 
ment in  its  relation  to  the  borrower's  business.  Besides 
the  analysis  indicated  on  this  chart,  the  credit  depart- 
ment of  this  bank  emphasizes  the  importance  of  sizing 
up  an  applicant  according  to  what  is  termed  the  three 
C's  of  credit,  as  follows: 

Character 

Reliability. — ^Business  and  social  honor.  Squaring  himself  with 
the  world  and  keeping  himself  so. 

The  Man. — ^Personal  deportment.  Leading  a  clean,  temperate 
life.    Character  of  associates. 

Moral  Risk. — ^Reputation.  Built  up  by  long  years  of  honest 
dealing. 

Capacttt 

Capability. — ^Age,  health,  education.  Is  he  mentally  and 
physically  capable  of  conducting  his  business  successfully? 

The  Methods. — Business  experience?  Is  he  experienced  or  is  he 
a  novice?  Has  he  demonstrated  his  ability  to  manage  a  business? 
Does  he  manage  this  one  well? 

Business  Risk. — Personal  effort.  Has  he  built  it  up  himself  or 
did  he  inherit  it? 

Capital 

Responsibility. — ^That  which  can  be  taken  under  an  execution. 
Does  it  consist  of  property  and  other  assets  of  a  tangible  character 
convertible  into  money  without  great  cost  and  undue  delay? 

The  Means. — Resources  personally  acquired  or  inherited?  Is 
the  capital  borrowed  or  inherited,  and  if  so,  are  there  any  "strings" 
to  it? 

Property  Risk. — Net  wealth.  Is  the  capital  ample?  Will  the 
lack  of  capital  make  overborrowing  necessary? 

After  carefully  considering  these  three  elements,  the 
prudent  bank  credit  man  should  then  ask  himself  the 
following  questions  and  see  that  they  are  accurately 
determined : 

Are  the  net  profits  commensurate  with  the  volume  of  the 
borrower's  business  and  the  capital  employed? 


it 


HOW  TO  SIZE  UP  STATEMENTS 


87 


Has  adequate  provision  been  made  for  the  depreciation  of  fixed 
assets,  plant,  machinery,  and  so  on? 

Has  adequate  provision  been  made  for  losses  on  bad  accounts? 

Has  adequate  provision  been  made  for  sinking  funds  for  the 
retirement  of  the  bonded  debt? 

Have  dividends  been  paid  or  withdrawals  made,  and  if  so  have 
these  been  made  out  of  the  current  year's  profits  or  from  previous 
surplus  capital? 

How  do  the  sales  and  profits  for  the  period  covered  by  present 
statement  compare  with  these  for  corresponding  periods  in  the 
past?    Do  they  show  a  loss  or  gain? 

Is  he  accumulating  a  surplus  to  provide  additional  working  capital 
to  care  for  increasing  business  or  are  profits  disbursed  leaving  him 
dependent  on  borrowed  money  for  working  capital? 

The  analysis  of  the  statement,  to  be  of  any  value, 
consists  in  determining,  along  lines  to  be  shown, 
whether  the  figures  indicate  that  the  borrower,  whether 
an  individual  or  a  corporation,  has  enough  assets  to 
fully  hquidate  his  liabiUties.  It  is  essential,  therefore, 
for  the  bank  to  know,  for  one  thing,  the  ratio  of 
quick  assets  to  current  liabilities.  It  has  become  a 
practice  among  credit  men  to  demand  that  the  current 
assets  amount  to  200%  of  the  current  liabilities.  This 
is  commonly  known  as  the  2  for  1  rule. 

Let  us  turn  now  to  the  actual  analysis  of  a  state- 
ment.   Two  rules  are  pretty  well  established: 

First :  Quick  assets  only,  as  akeady  mdicated,  form 
the  basis  for  loans. 

Second :  Fixed  assets  are  only  considered  as  giving 
a  more  or  less  definite  support  to  quick  assets. 

There  is  also  another  rule,  based  on  the  character  of 
the  business,  which  is  observed  by  many  banks.  This 
rule  provides  briefly  that  the  debt  limit  of  the  borrower 
has  been  exceeded  when  his  liabiUties  are  more  than 
50%  of  his  quick  assets.  On  this  basis  there  are  three 
facts  that  the  well-managed  credit  department  should 
estabUsh  as  accurately  as  possible: 


\ 


ii 


I  H4 


88  ANALYZING  CREDITS 

1.  Excess  quick  assets  or  working  capital 

2.  Proportion  of  quick  assets  to  current  liabilities 

3.  Net  worth 

These  are  determined  by  a  most  careful  analysis 
of  all  the  figures  in  comparison  with  those  given 
on  previous  statements. 

Taking  up  the  analysis  of  the  average  statement, 
the  prudent  bank  credit  officer  interprets  the  items 
somewhat  in  this  way: 

Cash  on  Hand.  A  large  simi  usually  indicates  loose 
business.  To  be  liquid,  it  should  be  actual  cash,  not 
memoranda  or  **cash  items." 

Cash  in  Bank  to  be  quick  must  be  free  of  any  liens 
or  offsets  and  withdrawable  on  demand.  When  this 
amount  is  in  proper  ratio  to  outstanding  obligations, 
including  services  performed  by  the  banker,  the 
statement  to  this  extent  is  strong,  and  many  banks 
feel  that  where  it  is  good  poUcy  for  customers  to 
estabUsh  close  relations  with  the  bank  on  a  reciprocal 
basis,  the  customer's  balance  should  be,  say,  not  less 
than  20%  of  the  loans  extended,  together  with  an 
additional  amount  to  cover  transit  and  exchange 
cost  of  items  deposited.  Inasmuch  as  the  cost  of  an 
account  should  be  part  of  the  data  of  every  bank 
credit  department,  as  set  forth  in  the  volume  on 
accoimting  and  costs,  it  is  interesting  to  compute  the 
expense  of  an  account. 

Suppose,  for  instance,  that  the  average  daily  balance 
of  a  customer  for  a  month  is  $12,000.  Against  this 
the  bank  must  carry  a  reserve  in  cash;  a  reserve  in 
the  central  reserve  cities;  a  reserve  in  the  federal  bank, 
if  a  member  of  the  system;  and  reserves  in  excess  of 
legal  requirements  as  well  as  secondary  reserves  in 
the  form  of  balances  with  banks  in  other  cities  which 
are  not  legal  reserves,  to  compensate  those  banks  for 
clearing  all  of  its  items  in  their  respective  territories. 
Even  the  largest  banks  with  their  complete  equipment 


To  the  MISSISSIPPI  VALLEY  TRUST 
COMPANY,  SAINT  LOUIS,  MISSOURI 

For  the  purpose  of  procuring  credit  from  time  to  time  from  yoa  for 
my  negotiable  paper  or  otherwise,  I  furnish  you  with  the  following  state- 
ment, which  fully  and  truly  sets  forth  my  financial  condition  on  the . 

^y  of 19 ,  which  statement  you  can  consider  as  contin- 
uing to  be  full  and  accurate  unless  written  notice  of  change  is  given  you.  I 
agree  to  notify  you  promptly  of  any  change  that  materially  reduces  my  Gnan- 
cial  responsibility  or  jeopardizes  in  any  way  the  value  of  the  security  back 
of  my  obligation  to  you. 


ASSETS  I  OWN 

DEBTS  I  OWE 

CASH  IN                                       BANK 

s 

NOTES  PAYABLE 

f 

CASH  ON  HAND 

ACCOUNTS  PAYABLE 

NOTES  SECURED  BY  INDORSE- 
MENT AND  CONSIDERED  GOOD 

CHATTEL  MORTGAGES 

NOTES  SECURED  BY  REAL 
ESTATE 

MORTGAGES  AND  LIENS  ON 
REAL  ESTATE 

STOCKS  AND  BONDS  PER 
SCHEDULE 

• 

REAL  ESTATE  IN  MY  NAMK 
PER  SCHEDULE 

LIVE  STOCK 

s 

MACHINERY 

s 

< ,      

- 

X 

1 

• 

« 

w 

TOTAL 
ASSETS    $ 

o 

TOTAL  DEBTS 

NET  WORTH 

. 

TOTAL  ASSETS 

TOTAL  DEBTS 

I 


1  ;• 


Figure  32 :  For  simplicity  of  make-up  this  statement  form,  used  satis- 
factorily by  a  middle-western  bank,  is  striking.  It  has  served  espe- 
cially well  for  individual  borrowers  whose  financial  and  banking  ex- 
perience has  not  been  extensive.    The  second  and  third  pages  follow. 

89 


SCHEDULE  OF  REAL  ESTATE 

DESCRIPTION  AND 
LOCATION 

VALUE 

MORTGAGES                            | 

CHARACTER 
OF  LIEN 

TO  WHOM 

WHEN  DUB 

AUOUNT 

, 

looitioa  if  Una  Undt,  and  to  forth.    Show  moctfafc  if  any  opponte  each  parcel. 

SCHEDULE  OF  STOCKS,  BONDS 
AND  SECURITIES 

DESCRIPTION 

•  PLBOOBD  OK 
UNPLKDOBD 

MARKET 

VALUE 

*  fltatc  if  pledged  to  secure  loans  or  if  free  from  lieos. 

Figure  32:  This  arrangement  has  been  of  help  in  simplifying  the 
credit  routine.  The  grouping  is  especially  practicable.  For  instance, 
under  real  estate,  spaces  are  provided  to  show  exactly  the  financial 
condition — ^whether  covered  by  a  mortgage,  and  if  so  the  main  facta 

90 


V 


INSURANCE  CARRIED 
ON  MY  LIFE  $ 


PAYABLE  TO 


LIVE  STOCK  CONSISTS  OF 


FIRE  INSURANCE  AND 
TORNADO  INSURANCE 


NOTES  OUTSTANDING. 
PAYABLE  TO 


NOTES  INDORSED.  FOR  WHOM 


CHATTEL  MORTGAGES. 
IN  FAVOR  OF 


REMARKS: 


(SIGNED) 


ADDRESS 


DATE 


regarding  the  transaction;  similarly,  the  securities  arc  lined  up  for 
the  benefit  of  the  credit  officer.  The  last  page  carries  out  the  same 
brevity.  The  banker  thus  can  size  up  a  borrower's  statement  in  the 
quickest  possible  time  and  determine  his  financial  condition  accurately. 

91 


\     i 


II 


N 


92 


ANALYZING  CREDITS 


and  facilities  cannot  possibly  send  every  out-of-town 
check  direct  to  the  bank  or  place  of  payment;  but  the 
larger  the  bank  the  more  nearly  items  can  be  sent 
direct.  Relatively,  therefore,  the  small  bank's  burden 
may  sometunes  be  greater.  Going  back  to  the  instance 
cited,  these  reserves  make  up  a  total  of  over  $3,500. 
That,  presumably,  will  leave  a  balance  of  $8,500  to 
lend  to  the  customer.  But  this  figure  is  far  from 
accurate,  because  exchange  and  collection  charges 
must  also  be  deducted. 

JUST  WHAT  PROPORTION  OP  A  FIRM'S  ASSETS  SHOULD 
CONSTITUTE  "CASH  IN  BANK" 

Notes  Receivable.  These  are  not  quick  if  they  rep- 
resent past-due  notes,  stockholders'  notes,  "straw 
men"  for  stock  supposed  to  be  fully  issued;  obligations 
of  officers  and  directors  having  their  all  invested  in  the 
corporation;  "kited"  notes,  or  notes  taken  for  past  due 
and  perhaps  worthless  accounts.  If  it  is  the  custom 
of  the  particular  business  under  consideration  to  accept 
notes  from  first-class  debtors,  notes  receivable  are 
better  assets  than  open  accounts;  but,  in  most  staple 
lines,  it  has  become  the  method  of  buyers  to  purchase 
on  open  account  and  anticipate  or  discount  bills. 
However,  because  of  the  Federal  Reserve  Board's 
preference  for  double-name  paper  drawn  on  a  pur- 
chaser against  an  actual  sale  of  goods,  which  is  prima 
facie  evidence  of  its  self-hquidating  nature  and  its 
character,  trade  acceptances  are  gradually  taking  the 
place  of  these  open  accounts.  Chapter  XVIII  takes 
up  the  subject  of  the  trade  acceptance  as  a  credit  risk. 

Accounts  Receivable,  This  is  supposed  to  be  the 
sum  of  all  bills  for  merchandise  sold  to  customers, 
which  are  not  yet  due.  This  item,  however,  has  in 
some  instances  been  found  to  include  such  slow  assets 
as  disputed  freight  claims;  overdrafts  of  officers, 
directors,  or  salesmen;  bills  long  overdue;  or,  in  fact, 


HOW  TO  SIZE  UP  STATEMENTS 


93 


items  not  "receivable"  at  all,  but  merely  "advances" 
or  "deferred"  items. 

Accounts  Receivable  pledged  for  loans.  If  an  asset 
at  all,  are  considered  slow  and  indicate  that  the  limit 
of  credit  for  single-name  loans  has  been  exceeded. 
This  practice,  of  course,  subjects  to  a  lien  the  best 
liquid  assets  on  which  the  banker  has  based  his  credit. 
Good  notes  and  accounts  receivable,  when  properly 
compared  with  net  sales,  on  a  basis  of  definite  trade 
terms,  are  a  fau-  barometer  of  the  borrower's  credits 
and  collections.  If  the  terms  are  60  days,  accounts 
still  outstanding  of  over  one  fifth  of  the  net  sales  may 
be  cause  to  question  the  borrower's  methods. 

IF  THE  INVENTORY  ITEM  LOOKS  SUSPICIOUS.  HERE  ARE 
SOME  WAYS  YOU  CAN  TEST  ITS  REAL  WORTH 

Merchandise.  The  inventory  is  the  acid  test  of 
honesty.  In  analyzing  this  item  it  is  unportant  to  see 
that  the  inventory  has  not  been  marked  up  to  an 
inflated  figure.  Probably  nothing  in  a  statement 
makes  a  banker  suspicious  more  quickly  than 
figures  which  show  that  profits  not  realized  on  unsold 
goods  have  been  taken  in  a  current  period.  Finished 
goods  should  be  valued  at  cost  or  market  price,  which- 
ever is  the  lower,  and  not  at  sales  prices.  "Cost" 
may  include  all  expenses  incurred  in  manufacturing; 
but  in  no  event  should  conservative  methods  admit 
of  the  addition  of  any  part  of  administration  or  selling 
expenses  to  the  cost  of  goods.  This  would  throw  the 
financial  statement  out  of  balance. 

It  is  conservative  procedure  to  inventory  unfinished 
goods  as  raw  material  and  at  the  present  market  cost. 
Supplies,  stores,  and  so  on,  while  consumed  in  the 
general  activities  of  manufacturing,  do  not  themselves 
form  an  integral  part  of  the  products  manufactured 
and  they  are,  therefore,  considered  slow  assets  and 
not  a  part  of  the  merchandise. 


n 


94 


ANALYZING  CREDITS 


n  I 


The  inventory  is  one  of  the  two  big  items  for  the 
banker  to  watch  in  nearly  every  statement,  and  is 
probably  second  only  to  the  other — the  item  of  accounts 
and  bills  receivable.  Both  take  time  to  liquidate,  in 
contrast  to  cash  on  hand  and  in  bank,  which  is  fully 
liquid.  While  uncut  raw  material  of  a  standard  variety 
could  ordinarily  be  thrown  directly  on  the  market, 
experience  has  shown  that  it  almost  always  is  needed 
in  the  finishing  process  to  prepare  the  unfinished  goods 
for  satisfactory  liquidation.  This  sometimes  causes 
the  merchandise  inventory  to  appear  a  little  slow  when 
compared  to  cash  and  receivables,  and  is  a  point  for 
the  banker  to  keep  in  mind  in  sizing  up  a  statement. 

Stocks,  BondSy  and  Investments.  When  the  banker 
does  not  request  detailed  data  on  this  item  to  deter- 
mine its  actual  worth  and  whether  it  is  quick  or  slow, 
his  proper  method  of  analysis  is  to  treat  it  all  as  slow. 
If  made  up  of  investments  in  subsidiaries  where  it 
must  remain  for  an  indefinite  time  to  enable  those 
concerns  to  carry  on  their  business,  it  is  unques- 
tionably permanent  and  slow. 

The  banker  who  profits  from  experience  will  re- 
quire from  a  company  which  is  extensively  financing 
branches  and  subsidiaries  a  consolidated  balance- 
sheet  made  up  by  a  competent  certified  pubUc  accoim- 
tant.  In  this  way  he  can  learn  broadly  the  concern's 
standing  financially  and  with  the  outside  public 
(Chapter  XI).  This  item  should  not  include  unissued 
stocks  and  bonds  of  the  corporation  itself,  which  are 
not  an  asset;  and  even  issued  stocks  or  bonds,  tem- 
porarily repurchased,  are  not  quick  if  the  concern  is  a 
close  corporation.  If  a  corporation  is  forced  into 
liquidation,  and  its  securities  are  even  listed  on  an 
active  stock  exchange,  such  securities  will  have  only 
a  speculative  market  and  a  residual  value,  which  can 
only  be  indefinitely  determined  when  the  concern 
is  entirely  liquidated. 


HOW  TO  SIZE  UP  STATEMENTS  95 

Permanent  or  Slow  Assets.    The  only  consideration 
which  a  banker  gives  to  the  several  items  under  this 
head  is  generally  comparative  in  character.    You  can 
search  here  for  symptoms,  should  other  items  of  the 
statement  present  a  sickly  appearance,  or  should  the 
profit  and  loss  figures  look  too  healthy,  all  other  con- 
ditions being  equal.    If  a  concern's  capital  is  nearly 
all  invested  in  permanent  assets,  it  is  poor  busmess, 
usually,  for  the  banker  to  furnish  more  than  a  nommal 
amount  of  working  capital,  at  most.    No  matter  how 
much  money  has  been  actually  invested  in  permanent 
assets,  its  liquidation  always  means  waiting  for  a 
prospect,  then  long  negotiations,  and  finally  a  sale  at 
a  sacrifice.     Sometimes  additional  money  has  to  be 
advanced  to  save  the  loans  aheady  made.    Then  it  is 
that  the  banker  enters  into  the  manufacturing  or  real 
estate  business  for  an  indeterminate  period— a  necessity 
no  banker  wishes  to  incur.    In  slow  assets,  too,  may 
also  be  found  the  all  too  common  subterfuge,  "marking 
up''  to  conceal  a  depletion  of  surplus  or  capital,  which 
is  sometimes  called  ''window  dressing." 

OTHER  POINTS  YOU  CAN  USE  IN  JUDGING  A  CUSTOMER'S 
BUSINESS  ABILITY  FROM  HIS  STATEMENT 

Notes  Payable  for  Merchandise.  If  a  large  amount 
has  been  borrowed  from  banks  on  the  implied  contract 
that  it  is  for  the  purpose  of  discounting  bills,  which  in 
some  lines  yields  from  10%  to  25%  a  year,  this  item, 
if  large,  may  indicate  a  lack  of  cash  capital,  unless  the 
busmess  is  of  the  sort  which  usually  gives  notes  for 
merchandise  purchases.  In  that  event,  however,  the 
bank  borrowings  should  be  small.  This  item  should 
show  only  a  normal  percentage  to  purchases. 

Notes  Payable  to  Own  Banks.  It  is  frequently 
difficult  to  draw  a  clear  distinction  between  current 
loans  and  those  made  for  capital  purposes.  Loans 
made  against  accounts  and  bills  receivable  and  paid 


I 


IMDtVIDVAL  AMD  FMV 

TO  WAYNE  COUNTY  AND  HOME  SAVINGS  BANK.  DETROIT.  MICHIGAN 

The  undersigned,  for  the  purpose  of  procuring  credit  from  time  to  time  from  you  for  the  negotiable  paper 
of  the  undersigned  or  otherwise,  furnishes  you  with  the  following  statement  and  informatioa 

which  fully  and  truly  set  forth  the  financial  condition  of  the  undersigned  on  the 

day  of 19 .  which  you  may  consider  as  continuing  to  be  ftill 

and  accurate  unless  notice  of  change  is  given  you.    The  undersigned  agrees  to  notify  you  promptly 
of  any  change  that  materially  reduces  his  pecuniary  responsibility. 

In  consideration  of  the  granting  of  such  credit,  the  undersigned  agrees  that  if  he  at  any  time  fails  or 
becomes  insolvent,  or  commits  an  act  of  bankruptcy,  or  if  any  of  the  representations  made  below 
prove  to  be  untrue,  or  if  the  undersigned  fails  to  notify  you  of  any  material  change  as  bcfor* 
agreed ;  then  and  in  either  such  case  all  obligations  of  the  undersigned  held  by  you  shall  immedi- 
ately become  due  and  payable  without  demand  or  notice,  and  the  same  may  be  charged  ■£«!«■» 
the  balance  of  any  deposit  account  of  the  undersigned  with  you.  the  undersigned  hereby  giving 
a  continuing  lien  upon  such  balance  of  deposit  account  from  time  to  time  cxistiag  to  sacura  all 
obligations  of  the  undersigned  held  by  you. 


Signed. 


ASSETS 

LIABILITIES 

Caih  oa  Hand  and  M 
BUla  Reenvabl*.  sD 
Aee'n  Receivable,  at 
MerchandiM.  Ilniaho 
Mcrchandue,  unfinia 
Machinery  and  FlM\ 
Hone*.  Wacont.  A<K 
Stock*  and  Boad»— 1 
lattrcft.  Inauranet, 
Real  Ettate— Marlw 

.  lU..!. 

Klk  *>Y-*>>*  *"  MfThandtot  . 

|0od.  «winc  by  CaataawTS  _ 

B<1ft  PayaM*  nrfntiated  m  mm  Banka 

1  aood,  owins  by  CuatooMra 

mam  P»yhl»  nrh»w<^  ili.rn..it  W      __. 

K«4  (««-,  ..hrH      ) 

irea 

naaobilea  bclea(ii^  to  Am . 

iMits  mM«  tmm  Rial  Vttat*  Mimn^M 

M»k^  V.I... 

•*^«"""'          

t  V.I.- 

' 

OlberiadcbtedaMS 

J 

and  of  what         / 

1 
Otficr  Aaet*  and  or 

what  compeaed 

*                         ..      .     _ 

V,,.,. 

i 

r 

Tm>I  1.1,M1M.t        . 

\ 

^ 

Na*  WoMk    . 

... 

*•>••» 

Ta>.I 

_ 

_ 

Coatiagcnt  UabilMy 


ladoewd  BUla  Reaivablc  (kitftaodii^  $. 
Upoo  Acroeninfwiation  IndocwmtBta.  $_ 
For  Ouaraotcaa.  f 


Names  in  full  of  general  partners  and  the     ' 
respective  worth  of  each  outside  of  the 
business. 

Names  in  full  of  special  partners  with 
waouats  contributed  by  cacfa  and  until 


Vym\ 


Figure  33 :  Smaller  banks  sometimes  do  not  find  it  necessary  to  have 
customers  make  out  as  detailed  a  statement  as  those  shown  previouslya 
For  such  banks  the  above  combination  of  individual  and  firm  statements 
may  contain  ideas  of  interest.     It  includes  the  agreement,  the  conveni- 

96 


MEMORANDA 


Give  basis  of  this  autemaxt;  if  oo  actual  inventory 
state  by  whom  taken  and  date 

Regdlar  time  for  taldng  inventory 

What  amount  of  Aecounti  and  Billt  Receivable  in  thia  statement,  not  charged  off,  is  past  due. 

extended  ot  renewed.  8 


Amount  charged  off  fm  bad  debts  last  fiscal  year.  $ . 

Amount  recovered  during  same  period,  $ 

Sales  preceding  year.  $ . — _ 


Amount  withdrawn  from  business  preceding  year.  $ . 


Insurance  carried  on  merchandise  at  date  of  statement,  % 

REAL  ESTATE: 

Location  (give  legal  description  and  street  name  and  number). 


.On  real  esUte.  $. 


Nature 


In  whose  name  is  title  held? — . — 

What  portion  has  been  acquired  through  bad  debts? . 


Do  you  ever  exchange  notes,  drafts  or  checks  wiA  any  person,  firm  or  corporation? — 
Do  you  ever  indorse  paper  for  the  accommodation  of  any  person;  firm  or  corporation? . 
Bank  accounts — ■ — 


State  last  date  of  taking  trial  balance  and  if  same  proved. 
Regular  times  ci.  balancing  books 


* 


Please  sign  here. 


Daite  signed . 


.19 


Address. 


THE  PEOPLE  OF  THE  STATE  OF  MICHIGAN  ENACT: 
Section  I.  Whoever  wilfiilly  and  knowingly  makes  any  false  statements  in  writing  of 
his  or  her  property  valuation,  real  or  personal,  or  both,  or  of  his  or  her  indebtediKSS  for 
the  purpose  of  obtaining  credit  from  any  person,  company,  copartnership,  association  or 
corporation,  shall  be  deemed  guilty  of  a  felony  and  upon  conviction  thereof  may  be  impris- 
oned in  the  sUte  prison  for  a  period  of  not  exceeding  one  year  and  fined  any  sum  not  ex- 
ceeding one  thousand  dollars.    Approved  May  13,  19 


ently  arranged  columns  for  the  assets  and  liabilities,  and  special  spaces 
for  entering  contingent  liabilities,  as  well  as  for  special  memoranda  on 
the  second  page.  Somewhat  unusual  is  the  excerpt  from  the  state  laws 
emphasizing  the  importance  of  stating   facts    and    figures    exactly. 

97 


1*1 


98 


ANALYZING  CREDITS 


off  as  these  receivables  are  collected,  would  be  classified 
as  current  loans,  or  seasonal  advances.  From  the 
standpoint  of  good  banking,  they  should  be  liquidated 
once  or  twice  a  year,  that  is,  between  seasons. 

Notes  Payable  for  Paper  Sold.  If  a  concern  is  borrow- 
ing its  full  line  from  its  bankers,  provided,  of  course, 
that  the  banks  are  able  to  grant  all  the  credit  to  which 
it  is  entitled,  then  it  should  not  use  a  note  broker  at 
the  same  time.  If  it  is  doing  both  and  giving  notes 
for  mechandise,  it  is  engaged  in  precarious  business 
and  should  come  under  the  careful  scrutiny  of  its 
bankers.  There  have  been  times  when  certain  cor- 
porations have  discounted  considerable  paper  through 
brokers  and  then  have  had  a  lapse  of  memory  and 
failed  to  enter  the  liability  on  their  statements.  How- 
ever, the  item  is  easily  checked  up  from  the  lists  of 
paper  offered  for  sale  by  the  various  bankers. 

Accounts  Payable.  Under  this  caption  should  be 
included  amounts  unpaid  for  purchases  in  contrast 
to  accrued  liabilities  such  as  interest,  taxes,  labor, 
and  so  on.  If  the  business  of  the  borrower  is  conducted 
properly  and  is  in  good  credit  standing,  accounts  pay- 
able will  contain  only  bills  not  due  or  not  subject  to 
discount.  If  trade  terms  and  net  sales  are  known, 
the  banker  can  determine  fairly  well  whether  bills  are 
being  paid  promptly. 

Deposits  of  Money  with  Us.  This  item  of  the  state- 
ment covers  loans  from  friends  or  relatives,  or  the 
savings  of  employees  which  may  be  held  in  trust,  all 
of  which  is  often  repayable  at  the  caprice  of  those 
depositing  the  money.  Concerns  listing  this  kind  of  a 
Uability  often  may  have  reached  the  outside  limit  of 
safety  on  loans  from  these  soiu*ces. 

Reserves.  If  all  of  a  bank's  customers  who  filled  out 
statements  were  accountants,  they  would  understand 
that  this  item  under  liabilities,  as  shown  in  Figure  20, 
represents  allocations  of  surplus  for  the  purpose  of 


HOW  TO  SIZE  UP  STATEMENTS 


99 


conserving  a  concern's  financial  interests.  The  figures 
are  obtained  by  reducing  the  surplus  available  for 
dividends.  Whatever  this  reserve  may  be  termed,  it  is 
in  reaUty  a  part  of  the  general  surplus  of  the  business. 
It  indicates  to  the  banker,  however,  a  tendency  toward 
careful  financing.  If  the  debit  or  offsetting  entries  are 
proper  charges  against  the  income,  then  the  so-called 
reserves  should  be  deducted  from  the  assets  to  which 
they  relate.  This  is  the  procedure  for  reserve  for 
bad  debts,  which  is  taken  from  the  quick  assets  shown 
in  the  analysis,  and  for  the  reserve  for  depreciation 
on  the  plant,  which  is  taken  from  the  slow  assets. 

This  summary  of  a  statement  analysis,  then,  gives 
a  bird's-eye  view  of  the  way  bankers  size  up  credits 
from  this  point  of  view.  Figures  32  and  33  illustrate 
simple  types  of  statement  which  meet  the  usual 
requirements  and  are  adaptable  to  abnost  any  bank's 
routine.  By  interpreting  them  correctly  the  credit 
officer  goes  a  long  way  toward  safeguarding  the  bank's 
funds.  But  there  are  still  other  important  details  to 
be  considered  in  connection  with  the  statement.  They 
will  be  taken  up  in  later  chapters. 


)! 


CHAPTER  VII 
DETERMINING  THE  PERSONAL  RISK 

DURING  its  first  year  of  business  a  wholesale 
firm  in  the  Northwest  received  loans  from 
its  bank  amounting  to  $33,000.  This  was  an 
unusual  acconmiodation  in  view  of  the  fact  that  the 
firm  was  capitalized  for  only  $50,000.  With  the  excep- 
tion of  a  small  amount  spent  for  necessary  fixtures, 
most  of  the  firm*s  capital  was  invested  in  merchandise. 
But  the  bank's  officers  saw  beyond  mere  figiu'es.  They 
saw  that  the  members  of  the  firm  had  ability,  capacity, 
and  vision.  One  proof  of  it  was  their  cautious  and 
conservative  policy  of  selling,  which  confined  their 
trade  territory  to  a  single  state  in  the  beginning. 

The  bank  also  made  a  thorough  investigation  into 
the  past  history  of  the  men  in  control  of  the  business 
and,  finding  the  morale  to  be  excellent,  gave  them  its 
confidence  and  support.  How  it  cooperated  in  up- 
building the  business  is  indicated  by  these  figures  of 
increasing  capital  and  surplus,  and  bank  indebtedness: 


Capital 

Capital 

and 

Indebtedness 

and 

Indebtedness 

Year 

Surplus 

to  the  Bank 

Yeflj 

Surplus 

to  the  Bank 

1900 

$  50,000 

$  33,000 

1908 

$105,000 

$  75,000 

1901 

60,000 

64,000 

1909 

110,000 

63,000 

1902 

62,000 

56,000 

1910 

123,000 

64,000 

1903 

73,000 

65,000 

1911 

144,000 

68,000 

1904 

89,000 

67,000 

1912 

170,000 

61,000 

1905 

96,000 

70,000 

1913 

184,000 

72,000 

1906 

99,000 

112,000 

1914 

195,000 

52,000 

1907 

105,000 

103,000 

1915 

215,000 

64,000 

l>  II 

t 


I 


!1 


I 


\l 


JUDGING  THE  PERSONAL  RISK 


101 


In  1906,  the  capital  and  surplus  totaled  $99,000. 
The  indebtedness  to  the  bank  that  year  totaled 
$112,000.  In  1907  the  capital  and  surplus  moved 
forward  to  $105,000,  while  the  indebtedness  to  the 
bank  for  that  year  totaled  $103,000.  Taken  at  their 
face  value,  these  figures  seem  to  be  out  of  proportion 
from  the  credit  viewpoint  of  the  banker.  Especially 
so  since  it  is  admitted  that  this  firm  was  comparatively 
new  in  the  jobbing  field  when  its  indebtedness  to  the 
bank  reached  the  highest  point.  Why  did  the  bank 
go  so  far  in  its  cooperation? 

The  answer  is  that  the  bank  was  extending  credit, 
not  so  much  upon  the  strength  of  the  financial  state- 
ment, as  outlined  in  the  previous  chapter,  but  upon 
the  integrity  of  the  men  back  of  the  business  and  their 
ability  to  handle  it.  Here  was  a  case  where  good 
banking  judgment  played  an  important  part. 

This  example,  which  is  typical  of  many  that  are  con- 
sidered by  bankers  from  day  to  day,  illustrates  clearly 
that  the  final  analysis  of  credits  is  primarily  an  analysis 
of  the  **moral  risk." 

The  moral  risk  is  the  risk  involved  in  entrusting 
funds  to  individuals,  as  such.  However  successful  a 
man  may  have  been  in  the  past  in  making  invest- 
ments, his  methods  of  success,  rather  than  the  success 
itself,  must  be  accepted  as  a  criterion  for  his  future 
actions,  when  considering  him  as  an  applicant  for  a 
line  of  credit.  Many  successful  business  men  have 
been  finally  ruined  when  their  unbusinesslike  meth- 
ods, which  they  have  concealed  in  the  past,  have 
come  to  light  and  they  have  shaken  the  confidence 
of  bankers  and  associates. 

If  a  man  who  applies  for  a  loan  is  unknown  to  the 
bank,  the  first  step  is  to  consider  his  credentials  and 
letters  of  introduction.  These  letters  should  be  from 
business  men  of  prominence  and  standing  whose 
authority  and  recommendations  the  bank  accepts. 


100 


I 


102 


ANALYZING  CREDITS 


It  is  probably  worth  noting  here  that  the  new- 
business  departments,  which  are  described  in  the 
volume  on  advertising  and  service,  exert  a  strong 
influence  in  the  direction  of  keeping  the  credit  depart- 
ment advised  of  the  character  of  customers  who  call 
at  the  bank  for  the  first  time. 

A  Brr  OF  TEAM  WORK  BETWEEN  THESE  TWO  DEPARTMENTS 
THAT  HELPS  TO  GET  NEW  BUSINESS 

A  national  bank  in  the  East,  for  example,  maintains 
a  new-business  department  which  promptly  makes  a 
record  of  each  newcomer.  Besides  his  name  and 
address,  the  customer  is  asked  to  tell  his  line  of  business 
and  his  past  banking  connections.  All  this  data  is 
noted  on  a  plain  3  by  5-inch  card  which  goes  into  an 
alphabetical  file.  A  dupUcate  is  sent  promptly  to  the 
head  of  the  credit  department.  When  the  officers  hold 
their  morning  conferences,  to  consider  loan  applica- 
tions of  the  previous  day,  the  list  of  new  customers  is 
read.  The  credit  department  then  sends  out  letters  to 
suppliers,  other  banks,  and  so  on,  to  determine  the 
character  and  personal  worth  of  the  newcomer.  When 
the  answers  are  received,  they  are  placed  permanently 
in  the  credit  files. 

In  this  way  the  bank  promptly  gains  possession  of 
definite  and  valuable  information  which  may  be 
quickly  referred  to  in  case  the  customer  asks  for 
credit.  Other  similar  methods  of  handling  this  sort  of 
information  to  best  advantage  are  described  in  Chap- 
ters I  and  XIV. 

How  this  simple  plan  works  out  is  illustrated  by  the 
following  incident:  A  business  man  who  had  long  been 
a  valued  customer  of  a  bank  introduced  a  woman  to 
one  of  the  officers.  After  the  preliminary  information 
had  been  placed  on  the  card,  the  credit  manager  began 
his  search  for  additional  information.  He  found  that 
the  woman  lived  in  comfortable  circumstances  in  a 


JUDGING  THE  PERSONAL  RISK 


103 


fine  residence  neighborhood  and  was  related  to  a 
family  of  wealth  and  good  reputation.  He  also  learned 
that  she  recently  had  received  an  inheritance.  She 
also  was  interested  in  church  and  charitable  work. 
All  this  information  he  placed  on  the  card  for  the 
permanent  credit  file. 

A  few  days  later  a  department  store  called  the  bank 
and  asked  about  the  woman's  credit  standing.  A 
favorable  report  was  given  with  the  result  that  the 
woman  a  little  later  returned  to  the  bank  and  opened 
a  checking  account  with  an  initial  deposit  of  $5,000.  ^ 
She  also  expressed  to  the  credit  manager  her  appreci- 
ation of  the  bank's  cooperation  in  making  a  favorable 
report  on  her  application  for  credit  at  the  store.  This 
is  only  one  of  many  similar  instances  wherein  the  bank 
has  found  it  easy,  with  the  aid  of  the  new-business 
department,  to  determine  the  personal  hazard. 

Of  much  the  same  character  ife  the  method  employed 
by  an  Ohio  trust  and  savings  bank.  It  furnishes  to 
the  stockholders,  directors,  officers,  members  of  the 
force,  and  old  customers,  small  booklets  each  contain- 
ing 10  introduction  cards.  Each  card  (Figure  35)  is 
easily  detached  on  a  perforated  line.  When  the 
prospective  new  customer  receives  one  of  these  cards 
he  naturally  has  quicker  access  to  the  officers.  When 
he  calls  at  the  bank,  the  officer  who  meets  him  tactful- 
ly questions  him  concerning  his  business  and  banking 
connections.  This  information  is  set  down  on  a  form 
like  that  shown  in  Figure  36.  Letters  are  sent  out  to 
past  banking  and  business  connections  to  check  up  on 
the  customer's  statement  and  the  results  of  this 
inquiry  are  sent  to  the  files  for  reference. 

Supplementing  this,  the  bank  subscribes  to  a  clipping 
bureau  and  scans  the  daily  newspapers  of  the  city  for 
any  reference  to  customers.  In  addition,  any  obser- 
vation or  gossip  that  bears  properly  on  the  customer's 
standing  is  also  noted  and  all  of  these  data  are  placed  on 


Ilv 


\\ 


r 

r       ^1 

r 

ii 


i 


CREDIT  DEPARTMENT 

John  H.  Hay**, 

1414  North  Ohio  Stroot. 

Cantoo.  Ohio. 

April  31 

In  the  Court  of  Coaapn  Plo&s.  vmddr  dmt*  April  SlJudgMnt  wm»   r«nd«r«d 

for  t76.40  liv  favor  of  thji  Saith  Tool  Works  a(aiast  tbo  party  above  naaod 

February  30 

Ztea  la  Newspaper  (clipping  attached)  John  H.  Hayes. residing  at  the  nuaber  above 

was  arrested  for  speeding  and  fined  $7  and  costs  in  Police  Court  No.  3. 


Figure  34:    Supplementing  its  other  information  about  depositors,  this 
bank  pastes  all  newspaper  clippings  of  importance  on  a  form  like  this. 


CM»tr.r.  April  16  tot 


Frank  Collins,  Cashier 

Firat  Trusf  *•  Savinga  Bank 
Canton,  Ohio 


Dear  Mr.  CoUina: 


This  will  introduce  to  you 
Mr.  John  Hayes 


8m 

Siflnature 
_Bel9w 


whose  signature  is  affixed  hereto,  to  whom  I  have  recommended 
your  institution  and  for  whom  I  bespeak  your  courteous  at» 
tent  ion. 

Mr.  Hayes  has  been  doing  his  business  with  the  Gibraltar 

Trust  Company,  but  through  the  inattention  and  discourtesy 

of  the  Teller  with  whom  he  is  compelled  to  transact  his 

business,  and  because  the  Cashier  of  the  Gibraltar  is  too 

busy  to  regulate  Teller's  conduct.  Mr     Hayes  finds  it 

lapossibltt  to  continue  his  dealings  there. 

Very  respectfully  yours, 

James  H.  Lunt 


fleeipii 


cM't  Signature     0      " 


Figure  35 :  This  customer  introduction  card  gives  the  reason  for  the 
depositor's  dissatisfaction  with  his  former  banking  connection,  which 
proves  a  valuable  guide  in  guarding  against  similar  mistakes  in  this  bank* 

104 


ACCOUNT  OPENED 


Name    '^"^^^  H>ya 


fLAAf^ff      15S  W«Bt  Madison  Str«tt 


m  m) 


ruta     April  31st.   1918 


MMHMMRioee. 


Main  6170 


Palnfr  end  PaprhengT 


BwkHeoPboiis     R»^«"»«ood  3. 


Character  of  Account:  ButineM  or  Peraonal. 


Both 


.First  DepoeH  S  160  44 


H  Borrowing  Account.  SUte  Terms     ""»  "^  ^^■^^«<^  "'"*-  "^  ^'""^^^  '^''  ^"^'''^  '^"- 


Probable  Batancs     $    ^vraf  about  tzoo. 

Other  Bank  *ri^«llntm     Bank  of  British  ColueblB.W«fer»nee  followd  up 


l«»>r— «      Ho  lnter>st        Com.        "o 


Account  Kepi  i^tth      Bank  of  British  Coluebla-cloilni  to  this  bank 


Reason  for  rhmn^tf     Wacantly  ca-  to  this  city  to  rsslde 

Lettar  of  thanks 
Introduced  t>y     Ja—s  H.  Unt  (our  atockholdar)  Acknowledged        ^°  aponaor 


Account  Opened  andSlsnaturealaken  by_![£5£!L£2iii£2 — 

ReM>lutiene  for  SlanlnflTaken  hy    wot  mcorporatad 

Check  il«ftlt      Ratular  folding  pockat Other  faipf"—      "o  Indorslnt  ataep 


REMARKS 

ttala  balow  any  esraanal.  prtvata  ec  tanaral  formation  of  vahia.  and  also  nota  any  ipacial  farwe  ar  ai^ 
nnoamanti  with  rafaranea  la  leana.  fraa  coUacttona  af  Kanw,  and  ae  forth.  In  tha  casa  of  a  firm,  fiva  tha  namaa 
tf  tl  aartiwra.  and  If  bwafparatad  tha  namaa  and  tMaa  af  oflkan. 

Mr.  John  Hayas  racantly  caaa  to  Canton  free  Lllyflald.  Alberta.  Ha  has  aetabllshad  hlnsalf 
at  tha  addraaa  abora  notad  In  a  saall  wall  papar  and  paint  buslneas  His  atock  of  eerchandlsa 
la  vary  SBall,  and  ha  can  at  this  ties  hardly  ba  claasad  a»  a  earchant   Will  do  Jobs  hleaalf 
until  bualnaas  eay  raqulra  an  aaaiatant   Ha  is  Introducad  to  us  by  Mr  Jaeas  H.  Lunt.  for 
when  ha  has  dona  work.  Bank  of  British  Coluabia  reports  thla  dapoaltor  a  noral  ean;  fraa  froe 

ill  report  in  hta  transactions  with  bank.  Avaraga  balajiea  carrlad  past  yaar   $360  59 

Prasent  worth  of  this  depositor  about  $900 __^ 


Caahiar  initials 
this 


Asst  Cashier 


Auditor 


Payer 


Mcelving  Taller 


Note  Teller 


Coll  Teller 


General  Bookkeeper 


12 


Individual  Bk 


Statement  Clerk 


Stenographer 


13 


14 


IS 


IB 


Figure  36:  How  thoroughly  one  bank  investigates  the  standing  of 
new  depositors  is  shown  by  this  summary  for  the  files.  The  facts  are 
usually  obtained  from  the  prospective  customer  himself,  after  which 
his  references    are    investigated    and    followed    up    for  verification. 

105 


106 


ANALYZING  CREDITS 


^1! 


a  form  like  that  shown  in  Figure  34.  This  record 
attached  to  the  individual  credit  file,  gives  the  officers 
valuable  up-to-the-minute  information  in  case  the 
customer  applies  for  credit. 

Methods  like  these  naturally  simplify  the  increas- 
ingly important  task  of  gaging  the  true  worth  of  the 
borrower.  It  is  thus  easier  to  learn  the  state  of  his 
finances,  his  credit,  and  his  past  record.  In  fact,  from 
many  sources  the  information  is  gathered  which  forms 
the  basis  for  estimating  the  applicant's  moral  risk. 
The  smaller  this  risk,  the  more  favorably  inclined  is 
the  bank  toward  lending  to  appUcant. 

Thus,  when  the  bank  knows  the  customer,  the 
advisability  of  extending  credit  may  be  apparent  very 
quickly.  If  first  the  honesty  of  the  applicant  is 
established  by  personal  knowledge,  as  ah-eady  de- 
scribed, the  other  phases  governing  the  granting  of  a 
loan  are  then  considered.  Honesty,  therefore,  probably 
more  than  any  other  single  factor,  determines  the 
advisability  of  acceptmg  the  borrower's  application. 
The  moral  risk,  the  business  career,  the  personal 
record — ^all  these  are  embodied  in  this  one  quality. 

Inasmuch  as  the  character  of  the  borrower  is  reflected 
in  his  conduct  of  business,  it  naturally  follows  that  the 
bank  should  seek  to  get  his  full  business  history. 
Apphcants  are  frequently  turned  down  because  they 
do  not  present  the  facts  of  what  they  are  doing  m  an 
easily  understandable  way.  This  weakness  has  helped 
to  hasten  the  development  of  the  outside  audit  in 
many  instances  (Chapter  XI). 

^  One  man  will  often  make  a  more  orderly  and  con- 
vincing showing  of  his  busmess  than  another,  but  if  a 
man  does  not  have  his  affairs  in  orderly  condition,  or 
show  a  good  grasp  of  them,  that  in  itself  argues  heavily 
ajgainst  him  as  a  risk.  In  these  days  of  keen  competi- 
tion there  is  a  presimiption  of  doubt  among  bankers 
about  the  continued  success  of  any  man  who  does  not 


JUDGING  THE  PERSONAL  RISK 


107 


have  a  good  grasp  of  the  details  of  his  business.  The 
man  whose  affairs  are  in  confusion,  who  does  not  have 
fresh  and  detailed  inventories,  who  neglects  his  collec- 
tions, who  is  careless  about  insurance,  who  does  not 
systematically  calculate  his  costs,  and,  in  short,  who 
does  not  keep  his  affairs  in  perfectly  intelligible  condi- 
tion, does  not  deserve  a  full  measure  of  consideration 
from  the  credit  department  of  his  bank. 

GETTING  AT  THE  PERSONAL  ELEMENT  BEHIND  THE 
FIGURES  WHEN  GRANTING  CREDIT 

Thus  the  principal  facts  which  the  bank  should 
request  from  a  borrower  concern  after  all  his  personal 
tendencies.  Has  he  always  paid  his  debts,  and  done  so 
in  a  prompt  and  businesslike  way?  Does  he  keep  his 
promises?  Are  his  expectations  based  upon  knowledge 
and  intelligent  calculation,  or  are  they  mere  guesses? 
If  he  is  new  in  the  community  he  should  be  asked  to 
show  the  previous  records  of  his  business  elsewhere. 
If  he  is  just  starting  in  business  for  himself,  he  should 
offer  his  complete  personal  record  as  an  employee. 

Bankers  cannot  be  expected  to  lend  money  to 
borrowers  who  cannot  show  their  personal  worthiness, 
established  by  years  of  upright  conduct.  Therefore, 
the  more  promptly  and  fully  the  applicant  shows  this 
up,  without  being  pressed  for  it,  the  more  promptly, 
and  favorably,  the  bank  may  form  its  conclusions. 

With  the  borrower's  personal  character  for  integrity 
and  reliabihty  is  closely  associated  his  established 
reputation  for  business  capacity.  The  banker  should 
know  what  his  experience  has  been,  and  what  success 
he  has  had.  This  has  a  direct  bearing  upon  his 
claim  for  a  line  of  credit. 

And  finally,  the  borrower  should  have  a  proper  pro- 
portion of  capital  of  his  own  in  the  business,  and 
should  be  able  to  show  that  what  he  borrows  from  the 
bank  is  for  temporary  use  and  will  correspondingly 


108 


ANALYZING  CREDITS 


!k     ' 


n 


increase  his  quick  assets.  Everything  that  he  owes 
the  bank  should  be  offset  by  merchandise  that  in  the 
natural  course  of  trade  will  be  moved  quickly.  It  is 
not  prudent  either  from  the  viewpoint  of  the  bank  or  of 
the  borrower  to  supply  money  to  invest  in  the  plant 
or  in  real  estate. 

A  manufacturing  concern,  established  only  a  short 
time  and  doing  a  good  business,  sought  its  first  loan. 
Its  chief  officer  made  apphcation  in  person  at  the  bank 
president's  office.  With  some  pride,  he  exhibited 
photographs  showing  the  plant,  exterior  and  interior. 

y  We  have  the  finest  little  factory  in  the  city,''  he 
said,  *'and  it's  paid  for.  We  own  the  equipment, 
free  of  debt.  Except  for  raw  material,  we  do  not  owe 
a  dollar.  We  sell  our  product  on  long  credits.  We 
want  to  grow,  but  we  haven't  the  money  to  carry 
more  accounts.  We  want  the  bank  to  help  us  extend 
our  credit  lines." 

The  banker  fimibled  the  photographs  for  a  moment 
and  complimented  their  artistic  finish.  Then  he 
tossed  them  aside  abruptly.  .  Tempering  his  words 
with  a  kindly  smile,  he  said: 

''Photographs  do  not  represent  the  best  security. 
We  do  not  lend  on  real  estate  or  factory  equipment. 
A  factory  may  be  the  best  in  the  world,  yet  be  idle 
tomorrow.  In  the  apphcations  that  come  to  us,  it  is 
very  conmion  for  business  men  to  emphasize  their 
fixed  assets  and  minimize  those  that  are  liquid.  We 
would  reverse  this  reasoning. 

"Now,  I'll  tell  you  what  to  do.  Just  forget  that  you 
have  the  finest  little  factory  in  the  city.  Bring  us  a 
statement  showing  what  you  have  done  in  the  past 
six  months.  Make  a  fist  of  your  accounts  receivable, 
with  all  the  information  you  can  furnish  concerning 
the  firms  that  you  owe  money.  Then,  if  you  choose, 
let  us  know  about  yourselves — your  capital,  stock- 
holders, officers,  stocks  of  goods,  organization,  -systems 


JUDGING  THE  PERSONAL  RISK 


109 


of  accoimts  and  costkeeping,  insurance,  advertising, 
buying,  salesmanship,  and  the  like.  But  remember  that 
we  want  especially  to  know  about  the  customers  who 
owe  you  money.  Do  not  be  afraid  of  going  too  much 
into  detail  about  them.  No  banker  ever  tires  of  listen- 
ing to  biographical  information  in  which  he  is  inter- 
ested, that  involves  cash.  Your  customers  are  the 
people  who  make  up  our  tangible  security  when  we 
make  you  a  loan." 

When  he  reached  his  office,  the  manufacturer  did 
what  the  banker  asked.  He  made  up  a  list  of  his 
accounts  receivable;  on  every  big  account  he  gave 
the  rating  and  financial  condition  of  the  concern, 
showed  how  much  he  owed,  how  long  the  account  had 
run,  the  average  time  this  firm  had  taken  to  pay 
before.  He  proved  that  his  customers  were  mostly 
sohd  concerns  who  paid  on  long  time  but  regularly. 
He  showed  that  his  accounts  payable  were  more  than 
covered  by  the  raw  material  at  the  plant. 

Then  appreciating  the  banker's  cooperation  and 
interest,  he  invited  him  to  inspect  the  plant.  He 
explained  to  the  visitor  his  organization,  his  various 
production  systems,  his  selling  plan,  pointed  out 
particularly  his  well-balanced  costs,  his  small  selling 
expense,  and  his  safe  margin  of  profit. 

By  that  time  the  banker  was  eager  to  make  the 
loan.  His  frank  talk  with  the  apphcant  had  borne 
fruitful  results.  The  manufacturer  eventually  got  a 
loan  equal  to  one  half  his  accounts  receivable  and 
became  a  most  desirable  customer.  This  instance 
shows  how  the  progressive  banker  can  get  at  the  true 
condition  of  applicants  and  how  he  can  increase  his 
business  and  choose  customers  of  good  moral  risk. 

Another  illustration  serves  still  fiu-ther  to  emphasize 
this  point.  A  concern  needed  more  money.  Its  own 
bank  had  lent  to  the  limit  of  the  firm's  line  of  credit. 
The  president  of  the  company  and  the  president  of 


Iff 


'^ 


lit 


110  ANALYZING  CREDITS 

another  bank  met  for  the  first  time.   The  manufacturer 
stated  his  case  frankly. 

''We  want  to  borrow  $25,000,"  he  said.  ''No 
doubt  you  know  about  us,  and  don't  need  to  be  told 
that  we've  got  a  high-class  product  and  a  good  market. 
Here's  oiu*  financial  statement.  It  shows  our  assets 
to  be  triple  our  liabilities." 

WHY  THIS  BANK  REFUSED  TO  MAKE  A  LOAN  ON  AN 
OTHERWISE  SOUND  STATEMENT 

The  bank  president  scanned  the  single  sheet  handed 
him.  It  showed  simply  the  main  items,  in  totals,  but 
gave  no  below-the-surface  details. 

''Looks  pretty  good,  doesn't  it?"  remarked  the 
manufacturer,  with  assurance. 

"Yes,'  assented  the  banker,  "it's  good  so  far  as  it 
goes.  But  our  discount  committee  would  not  authorize 
a  loan  on  this  report." 

The  would-be  borrower  at  first  was  incUned  to  take 
offense.  He  thought  the  standing  of  his  concern 
ought  to  count  for  something,  and  he  named  a  com- 
mercial agency,  as  an  additional  reference. 

The  bank  president  did  not  answer,  but  took  from 
his  desk  file  a  somewhat  bulky  document. 

"Here,"  he  said,  '4s  a  statement  filed  with  us  today 
by  a  concern  much  larger  than  yours.  Not  only  is  it 
made  in  almost  painful  detail,  but  it  is  certified  to  by 
an  audit  company." 

Then  the  banker  read  off  the  headings.  The  state- 
ment began  with  the  usual  tabulated  totals.  Then  it 
took  up  the  capital  stock,  both  preferred  and  common, 
and  went  into  detail  concerning  its  history,  owner- 
ship, and  legal  aspects;  it  gave  the  dividend  methods; 
it  showed  that  the  surplus,  if  any,  belonged  to  the 
conunon  shareholders. 

Then  followed  a  list  of  the  insurance  carried,  itemized 
by  companies,  amounts  and  exph-ations.    All  poUcies, 


JUDGING  THE  PERSONAL  RISK 


111 


the  report  showed,  carried  an  80%  coinsurance  clause. 
The  company  never  had  suffered  a  fire  loss. 

Next  came  information  regarding  the  company's 
banking  connections  with  the  statement  that  checks 
could  be  signed  by  the  president,  secretary,  treasurer, 
or  manager,  and  were  required  to  be  countersigned  by 
certain  officers.  Appended  to  this  was  the  report  of 
the  audit  company  showing  that  all  vouchers  had  been 
checked  and  proved. 

Following,  came  a  series  of  inventory  tables,  giving 
merchandise,  prices,  real  estate  values  and  the  like. 
There  were  detailed  tables,  too,  of  income  and  expense, 
returned  goods,  bills  receivable,  and  bills  payable. 
The  annual  and  average  profits  were  shown,  and  there 
was  a  "liquidated  statement,"  which  aimed  to  show 
what  could  be  realized  should  the  company  quit. 
Added  to  this  was  a  financial  statement  in  detail. 

A  fist  of  creditors  followed,  with  the  amounts,  the 
dates  due,  and  the  names  of  the  officers  of  the  cor- 
porations. The  company  showed  that  it  did  not  indorse 
for  outsiders  nor  allow  its  officers  to  do  so.  Nor  was 
there  any  contingent  obUgation,  pending  suit,  or 
judgment.  No  debts  were  past  due,  and  all  merchan- 
dise bills  were  discounted  within  10  days. 

The  individual  record  of  the  company's  officers  was 
included  in  the  document.  The  main  headings  were: 
age,  salary,  business  record,  married  or  single,  interest 
in  the  company,  clubs,  insurance,  duties,  habits, 
outside  interests,  liabilities,  health  and  education. 

When  the  bank  president  finished  reading  these 
headings,  the  applicant  by  his  side  sat  for  a  few 
seconds  in  meditative  attitude.  Then  he  picked  up 
his  own  Httle  single  page  statement,  and  smiled. 

"It  will  take  us  several  days  to  get  up  a  thing  of 
that  sort,"  he  said,  "but  we  can  do  it.  I  didn't  know 
banking  had  become  such  a  science." 

A  week  later  he  got  the  loan. 


112 


ANALYZING  CREDITS 


h,^ 


This  banker  knew  how  to  judge  the  personal  risk 
and  he  knew  how  to  get  from  his  customers  the  infor- 
mation that  would  enable  him  to  judge  correctly. 
Thoroughness  and  tact,  evidently,  are  the  qualities  for 
the  banker  to  exercise  in  dealing  with  appUcants. 
Then  not  only  is  all  the  information  to  judge  the  risk 
readily  forthcoming,  but  new  and  profitable  business 
follows  for  the  bank  as  well. 


V 


\ 


CHAPTER  VIII 

APPRAISING  THE  BORROWER'S  FINANCIAL 

CONDITION 

A  NYTHING  approaching  final  and  accurate  credit 
A\  information  concerning  the  borrower  must 
come  from  those  who  are  actively  engaged  in 
the  business,  or  from  experts  armed  with  the  facts 
developed  from  a  detailed  audit  of  the  borrower's 
books.  This  audit,  as  outlined  »in  Chapter  XI,  may 
be  the  work  either  of  public  accountants  or  of  auditors 
of  the  bank  to  which  application  for  a  loan  is  made. 
But  even  then  all  of  the  facts  have  to  be  thoroughly 
sifted  and  analyzed  with  reference  to  their  reciprocal 
influences  for  the  banker  to  see  them  in  their  proper 
balance  for  credit  piu-poses. 

It  is  necessary,  therefore,  bankers  have  found,  to 
go  beyond  the  figures  of  a  financial  statement,  as  set 
forth  in  Chapter  VI,  in  order  to  determine  the  appli- 
cant's true  financial  condition.  The  figures  really  are 
only  the  vehicle  by  which  the  real  basic  facts  of  the 
business  are  obtained. 

Let  us  take,  for  example,  the  condensed  balance 
sheet  of  an  eastern  concern,  which  reads: 

Assets 

Real  estate  and  improvements $  50,434.30 

Stocks  and  bonds 35,462.09 

Cash 8,479.19 

Accounts  receivable 47,329.77 

Inventory 45,899.00 

Total .$187,604.35 

113 


1< 


if 


Iff 


114  ANALYZING  CREDITS 

LlABIUTIES 

Capital  stock $  75,000.00 

Bonded  debt 10,000.00 

Bills  payable 39,538.83 

Accounts  payable 18,619.00 

Accrued  interest  and  dividends i  437.50 

Reserves 6,'809.02 

Surplus 37,200.00 

Total .$187,604.35 

These  figures,  of  course,  are  interesting.  They  may 
have  been  audited  and  may  have  the  appearance  of 
mirroring  a  model  business.  Perhaps  they  do.  Yet 
the  banker  cannot  know  even  from  the  statements  of 
a  most  favorable  character.  He  has  to  know.  He 
wants  every  item  of  information  possible  to  detei-mine 
the  status  of  the  business  for  his  own  protection.  That 
is  why  many  corporations,  on  the  reconmiendation  of 
their  bankers,  issue  additional  reports  including 
probably  a  property  account,  a  surplus  account,  and 
statements  of  various  facts  connected  with  the  con- 
struction work  and  the  operation  of  the  properties. 
These  detailed  statements  are  usually  available  for 
the  inspection  of  the  bank's  credit  department  and  the 
company's  stockholders  and  are  of  decided  importance 
in  amplifymg  the  statements  of  the  balance  sheet  and 
the  income  accounts. 

On  the  surface  these  reports  appear  intricate  and 
technical,  but  it  is  not  always  difficult  to  find  out 
exactly  what  they  mean.  As  a  matter  of  practice, 
their  preparation  involves  all  of  the  financial  points 
that  make  up  the  structure  of  the  business.  Therefore, 
careful  consideration  of  the  figures  of  a  statement  like 
that  shown  a,bove,  which  presents  a  mass  of  important 
information  in  small  compass,  is  necessary  to  reach  a 
correct  judgment  of  the  concern's  worth.  And  this, 
bankers  have  foimd,  requires  untirmg  patience  and 
extreme  caution. 


WHAT  IS  THE  BORROWER  WORTH?   115 

The  income  account  of  a  borrower  is  a  statement  of 
receipts  and  disbursements  for  a  given  period.  Net 
earnings  are  derived  by  subtracting  operating  expenses 
from  gross  earnings  and  other  income.  In  addition  to 
charging  operating  expenses  against  gross  income, 
every  well-regulated  concern  which  is  borrowing,  will 
charge  an  additional  sum  for  depreciation,  the  amount 
depending  upon  the  character  of  the  business  and  the 
nature  of  the  property.  The  amount  of  probable  loss 
from  wear  and  tear  is  calculated,  and  while  some  of 
it  is  met  by  replacements,  and  repairs,  there  is  never- 
theless a  continual  deterioration  which  can  only  be 
represented  by  a  depreciation  account. 

HOW  IS  THE  BALANCE  APPLICABLE  TO  DIVIDENDS  PROPERLY 
DISTRIBUTED  IN  THE  INCOME  ACCOUNT? 

From  net  earnings,  interest  on  bonds  and  floating 
debt  is  paid  and  a  sum  is  set  aside  as  a  sinking  fimd 
for  the  eventual  retirement  of  the  bonded  debt.  This 
amount  is  usually  determined  in  advance  of  any 
probable  bond  issue  and  is  stipulated  in  the  mortgage 
or  trust  deed  securing  the  bonds.  After  subtracting 
from  net  earnings  the  interest  and  sinking  fund  outlay, 
the  balance  is  appUcable  to  the  stock.  If  preferred 
stock  has  been  issued  it  is  a  first  claim  upon  this 
balance  and  the  dividend  is  paid  at  a  given  rate;  the 
remainder,  or  so  much  of  it  as  the  directors  may 
determine,  is  paid  as  a  dividend  upon  common  stock. 

The  general  balance  sheet  is  much  the  same  as  that 
already  described  in  Chapter  VI  and  consists  of  a 
statement  of  assets  and  liabilities.  Under  assets  are 
listed  the  property  of  the  concern  and  debts  due  it. 
Under  liabilities  we  find  the  company's  obhgations  to 
its  stockholders  and  creditors — ta  the  one  group, 
capital  stock;  and  to  the  other,  bonds,  notes,  and 
other  evidences  of  indebtedness.  The  amount  neces- 
sary to  make  the  two  columns  balance  may  receive 


'    i\ 


'! 


lit 


116 


ANALYZING  CREDITS 


» 


almost  any  name,  such  as  ''profit  and  loss,"  "surplus, 
or  *' deficit."  The  corporation  naturally  wants  to 
have  this  balance  on  the  liability  side  of  the  ledger,  thus 
showing  a  surplus  of  assets  over  liabilities. 

To  go  into  the  subject  in  greater  actual  detail,  let  us 
take  an  imaginary  industrial  corporation  and  try  to  se- 
cure some  knowledge  of  its  condition  by  a  comparison 
of  two  annual  statements.  This  will  be  better  than  to 
consider  only  a  single  annual  report,  for  a  comparison 
of  the  business  by  years  gives  the  best  estimate  of 
the  company's  progress  and  financial  condition.  We 
will  suppose  that  a  certain  corporation  is  capitalized 
originally  at  $900,000 — $500,000  consisting  of  common 
stock  and  $400,000  of  preferred  at  7%.  Prior  to  the 
date  of  the  first  report  we  shall  consider  that  the 
corporation  issued  bonds  to  the  amount  of  $500,000. 
The  general  balances  for  two  years  (Figure  37)  show 
the  items  set  opposite  each  other  for  purposes  of 
comparison,  and  also  the  net  increase  or  decrease. 

Let  us  suppose  that  the  property  account  has 
increased  $100,000  during  the  year  and  that  preferred 
stock  has  been  reduced  $100,000,  while  the  bonded 
debt  has  increased  $200,000.  From  this  it  is  reason- 
able to  infer  that  $100,000  of  preferred  stock  has  been 
retired  by  the  issuance  of  an  equal  amount  of  bonds 
and  that  another  $100,000  of  bonds  has  gone  into 
betterments.  Bills  and  accounts  have  been  closely 
collected  during  the  year  while  on  the  other  hand  the 
company's  obligation  in  the  form  of  outstanding  bills 
and  accounts  has  been  materially  increased. 

The  company  holds  considerable  bonds  and  stocks 
of  other  companies  and  further  investments  of  these 
holdings  show  a  heavy  increase.  The  depreciation 
account,  which  is  carried  as  a  continuing  habiUty  to 
offset  the  property  account  and  to  represent  wear  and 
tear,  has  Wcreased  by  $40,000,  and  $21,000  has  gone 
into  the  sinking  fund.    This  item  of  $21,000  belongs 


i; 


P 


^ 


] 


A  CCmPARISON  or  ANNUAL  STATaBfTS 

ASSETS 

S*eond  T«ar  First  Tear 

rroperty  account -...  »1. 325. 000  $1.225. 000 

XnT«ntorl«a 90.000  100.000 

Bills  recaivabla 20.000  30.000 

Accounts  racaivabU 18,000  25.000 

Truataas  of  alnklnf  nmd 96.000  75.000 

Bonds  and  atocks 219.000  100.000 

Othar  Invaataants 135.000  100.000 

CMh 15.000  20.000 

SI. 918.000  SI. 675. 000 

LIABILITIES 

Sseottd  yaar  First  yaar 

CosBoa  stoek S500.000  tSOO.OOO 

Prefarrad  stock 300.000  400.000 

Bondad  debt 700.000  500.000 

Bills  payabla 35.000  25.000 

Accounta  payabU 100.000  40.000 

DapreclatiOD 140.000  100.000 

Sinking  fund 96.000  75,000 

frofit  «ad  low <7,000  35-000 

•1.918.000  $1,675,000 


iBOrSBM 

Oeeraasa 

tioo.ooo 

t  10.000 

10.000 

7.000 

21.000 

119.000 

35.000 

««•...•■ 

5.000 
•  32.000 

t275.000 

iBcraaa* 

Dacraasa 



tioo.ooo 

1200.000 

10.000 

60,000 

40.000 

21.000 

12.000 

t343,000 


$100,000 


Figure  37 :  One  of  the  best  ways  to  discover  what  a  borrower  is  worth, 
all  will  agree,  is  to  compare  successive  annual  financial  statements. 
How  the  above  figures  are  analyzed  is  set  forth  fully  in  this  chapter. 


ZNCOME  ACCOtJNT 

ror  yaar  endlac  Daceabsr  31  — >  Second  year 

Crocs  aamints $450,000 

Otbar  Incoaa — ^OQQ 

Gross  IncoM $454,000 

Opsratins  axpanaaa $306,500 

Dapreclatlon. 40.000 

346,500 

Hstssntmcs $107,500 

Intarast  «  30.000 

Sinking  fufid 21,000 

81,000 

Balanca  appllcabla  to  stock $  56,500 

Olvldand  on  praferrod  stock  {7%) 24.500 

Balanca  appllcabla  to  coaaon  stock $  32.000 

CoaaoD  dividend 20.000 

surplus  for  tte  yaar t  12.000 


First  year. 

$475,000 
3.000 


$478,000 

$332,000 

40.000 

372,000 

$106,000 

$  29.000 
15.000 

40.000 

$  66.000 
28.000 

$  38.000 
25.000 

$  13.000 


Figure  38:  This  income  accoimt  sheet  affords  a  valuable  comparison 
of  a  business  over  two  annual  periods.  How  this  analysis  helps  the 
banker  to  determine  fully  a  borrower's  worth  is  told  on  page  118. 

117 


'I 


118 


ANALYZING  CREDITS 


on  both  sides  of  the  balance  sheet,  because  the  money 
or  securities  representing  it  are  held  by  the  smking 
fund  trustees  as  an  asset  to  discharge  the  sinking 
fund  liability.    The  year  shows  a  profit  of  $12,000. 

Let  us  now  consider  the  income  account.  There 
has  been  a  faUing  off  of  gross  earnings,  but  this  has 
been  offset  by  a  reduction  in  operating  expenses. 
Interest  has  increased  from  $25,000  to  $30,000,  which 
is  accounted  for  by  the  issuance  of  $200,000  of  new 
5%  bonds  on  which  one  semiannual  payment  of  interest 
has  been  made.    (See  Figure  38). 

The  amount  set  aside  for  the  sinking  fund  has  been 
correspondingly  increased  while  the  dividend  on 
preferred  stock  has  been  reduced  by  $3,500,  the  semi- 
annual dividend  on  the  $100,000  retired  by  the  issuance 
of  bonds.  To  depreciation  is  charged  $40,000.  After 
the  payment  of  operating  expenses,  fixed  charges  and 
preferred  dividends,  $32,000  remains  applicable  to 
common  stock  as  against  $38,000  the  preceding  year 
and  the  directors  have  declared  a  dividend  of  4%, 
leaving  a  net  surplus  of  $12,000. 

Thus  far  the  examination  is  superficial  and  might 
lead  to  the  conclusion  that  the  company  is  on  a  sound 
footing  with  increasing  prosperity.  But  there  is  much 
niore  in  the  statement  than  is  seen  at  first  glance  and 
dividends  may  have  been  declared  that  have  never 
been  actually  earned. 

It  is  worth  noting  that,  notwithstanding  the  large 
falling  off  of  gross  earnings,  there  is  a  corresponding 
reduction  in  operating  expenses.  This  decrease  m 
operation  may  be  entirely  legitimate  ahhough  operat- 
ing expenses  do  not  usually  respond  so  quickly  to  a 
decreased  income  unless  the  curtaihnent  is  due  to  the 
lopping  off  of  unprofitable  lines  of  trade  or  to  a  reduc- 
tion in  prices  consequent  upon  a  corresponding  decrease 
in  the  cost  of  production.  It  is  not  umeasonable  to 
suppose,  however,  that  in  the  present  instance  oper- 


t 


WHAT  IS  THE  BORROWER  WORTH?        119 

ating  expenses  have  been  kept  down  by  the  company's 
failure  to  charge  to  them  the  cost  of  replacements  and 
renewals  which  may  have  been  capitalized  and  paid 
for  from  the  proceeds  of  the  bond  issue. 

It  is  very  easy  when  replacing  an  old  machine  or 
an  old  building  with  a  new  and  a  modem  one,  to 
treat  the  improvement  as  an  addition  to  property 
when,  as  a  matter  of  fact,  it  adds  notliing  to  the  earning 
capacity  and  is  merely  a  replacement.  If  it  is  a  material 
addition  to  the  plant  it  justifies  the  increase  of  the 
company's  indebtedness  because  the  added  earning 
power  will  presmnably  be  sufficient  to  meet  the  debt, 
or  the  added  safety,  diu-ability  or  efficiency  will  result 
in  compensating  benefits.  But  if,  for  example,  a 
concrete  structm-e  has  replaced  a  wooden  one,  a 
difficult  question  may  arise  as  to  how  much  of  the 
cost  should  be  charged  against  earnings  and  how 
much  to  the  property  account  which,  of  course,  would 
form  the  basis  for  a  new  bond  issue.  To  issue  bonds 
for  the  entire  cost  of  such  an  improvement  instead  of 
charging  it  to  earnings  would  be  as  ill-advised  as 
issuing  bonds  to  pay  dividends. 

Still  other  items  in  the  balance  sheet  deserve  con- 
sideration. Accounts  and  bills  due  the  company  have 
been  reduced  while  outstanding  obligations,  par- 
ticularly accounts  payable,  have  heavily  increased. 
The  reduction  of  these  paper  assets  may  only  be  an 
evidence  of  cautious  management,  while  the  increase  of 
liabilities  may  mean  nothing  more  than  that  the 
company  is  taking  advantage  of  market  conditions  or 
an  increased  credit.  Nevertheless  these  changes  are 
so  great  as  to  compel  the  bank's  credit  officer  to  make 
inquiry,  for  as  a  rule  the  items  of  bills  and  accounts 
receivable  and  payable  should  remain  at  a  fairly 
constant  ratio. 

The  items  of  bonds  and  stocks  and  other  invest- 
ments show  a  large  increase.    Is  it  possible  that  the 


I, 


120 


m\ 


r 


III 


ANALYZING  CREDITS 


increase  of  these  investment  holdings  may  have  some 
relation  to  the  reduction  of  bills  and  accounts  receiv- 
able? Is  it  not  also  possible  that  a  part  of  the  new 
issue  of  bonds  has  been  paid  for  in  bonds  and  stocks 
of  other  companies  mstead  of  in  cash?  Is  it  reason- 
able to  find  the  bond  and  stock  mvestments  of  such  an 
industrial^  corporation  increased  from  $100,000  to 
$219,000  in  the  course  of  a  year  and  other  investments 
not  associated  with  the  business  increased  from 
$100,000  to  $135,000,  unless  these  investments  have 
to  do  with  the  sinking  fund?  These  investments  may 
be  high  grade  and  quickly  convertible  into  cash  when 
occasion  arises,  but  on  the  other  hand  the  large  increase 
in  the  holdings  suggests  that  the  concern  may  be 
branching  out  into  other  Imes  of  business  and  holding 
securities  of  speculative  or  questionable  value.  Such 
securities  might  be  unsalable  and  of  little  value  for 
the  purpose  of  hypothecation  if  the  company  should 
find  itself  in  need  of  cash  to  meet  outstanding  bills. 

DOES  THE  ANALYSIS  OF  THE  STATEMENT  SHOW  THAT 
EMERGENCIES  MAY  ARISE  IN  THE  BUSINESS? 

It  is  pertinent  now  to  inquire  whether  the  analysis 
suggests  that  an  emergency  may  arise  in  the  business. 
As  already  indicated,  there  may  be  ground  for  ques- 
tionmg  the  earning  power  of  the  concern,  but  nothing 
has  appeared  which  shows  a  dangerous  condition. 
However,  the  banker  wants  not  only  to  believe  but  to 
know  that  conditions  are  favorable  or  unfavorable. 
Are  there  enough  of  "quick  assets"  to  meet  current 
liabilities?  Bills  and  accounts  payable  stand  at 
$135,000,  an  increase  of  more  than  100%  over  the 
amount  of  current  liabilities  of  the  preceding  year. 
The  bills  will  shortly  mature  and  the  accounts  prob- 
ably average  about  60  days.  How  much  of  the  assets 
will  respond  to  a  quick  call  for  payment?  We  look 
first  at  the  cash,  which  has  fallen  to  $15,000.    The 


. 


WHAT  IS  THE  BORROWER  WORTH?        121 

total  amoimt  of  bills  and  accounts  receivable  has  been 
reduced  to  $38,000  and  it  is  not  safe  to  count  upon 
all  of  this  as  being  absolutely  good  and  unmediately 
collectable.  Unless,  therefore,  the  items  of  bonds, 
stocks,  and  other  investments  are  so  high  grade  that 
they  can  be  quickly  realized  upon,  our  concern  is  in 
danger  of  inunediate  insolvency. 

Thus  does  the  cautious  banker  go  into  every  detail 
connected  with  a  borrower's  business.  Only  in  this 
way  can  he  know  that  he  is  lending  safely.  The 
example  just  considered  is,  of  coiu^e,  more  or  less 
technical  and  may  not  be  typical  of  many  borrowers. 
However  it  offers  an  illustration  of  one  phase  of  work 
which  the  banker  will  have  to  cover  from  time  to 
time.  To  take  up  the  analysis  in  a  way  to  cover  the 
more  simple  phases  of  lending,  it  is  essential  primarily 
to  remember  that  merchandise  sold  is  merchandise 
** credits"  and  merchandise  bought  is  merchandise 
"debits."  Net  sales  is  merchandise  credits  or  gross 
sales,  less  all  returns,  necessary  allowances,  and  similar 
expenditures  incurred. 

The  cost  of  material  or  merchandise  consumed 
represents  the  inventory  at  the  beginning  of  the  year, 
plus  the  material  or  the  merchandise  purchased  during 
the  current  year  (mostly  merchandise  debits),  less  the 
inventory  of  the  ciu-rent  year. 

The  actual  expense  of  conducting  the  business  is 
considered  to  be  manufacturing  cost,  the  selling,  office, 
general,  and  administrative  expenses.  Under  this 
condensed  form  of  arriving  at  a  financial  statement 
this  head  would  include  repairs,  renewals,  and  replace- 
ments unless  the  business  is  so  poor  that  the  borrower 
attempts  to  capitalize  these  items. 

Right  here  contingent  liabilities  is  a  subject  that 
deserves  careful  consideration.  Frequently  a  state- 
ment is  submitted  with  the  word  *'none"  written  after 
questions  pertaining  to  this  item  when,  as  a  matter  of 


-1 


122 


ANALYZING  CREDITS 


i 


t 

I 

■\ 

B 

I 

1 

|!'  ■   : 

■ 

k  '' 

f^H 

r- 

fl 

*    ^ 

^Bl 

^ 

H 

■4 

J 

'A  \    « 


fact,  the  concern  sending  in  the  statement  has  under 
discount  a  considerable  line  of  customers'  paper,  which 
is  a  contingent  liability  until  it  is  paid  by  the  customer 
or  by  the  concern  itself,  for  customers  do  not  always 
pay.  Paper  of  this  kind,  originally  taken  for  overdue 
accounts,  if  renewed  often  and  then  shifted  from  one 
bank  to  another,  would  be  Usted  as  ''notes  payable," 
since  it  has  become  an  actual  and  no  longer  a  con- 
tingent liability.  When  a  company  has  obligated 
itself  on  stock  subscriptions,  on  indorsements  for 
the  benefit  of  others,  on  guarantees  to  make  good  any 
defects  on  contract  work  or. goods  sold,  on  purchase 
contracts  for  future  delivery,  on  various  kinds  of 
bonds,  and  so  on,  the  banker  should  know  it.  Further- 
more, when  the  obligations  are  somewhat  large, 
reserves  should  be  estabhshed  to  meet  the  probable 
contingencies  which  might  arise. 

Under  ''notes  payable''  the  borrower  should  be  asked 
to  "state  the  maxhnum  amount  borrowed  from  all 
sources  during  the  fiscal  year  just  closed"  because 
most  concerns  close  their  books  and  make  up  annual 
statements  between  seasons  when  their  business  is 
employing  the  least  or  no  borrowed  money,  thus 
presenting  the  best  figures.  The  proportion  of ' '  quick  " 
assets  and  Habilities  changes  perceptibly  when  firms 
are  carrying  maximum  liabilities. 

Consequently,  there  is  sufficient  justification  for  the 
banker  to  ask  many  questions  if  he  is  going  to  deter- 
mine accurately  what  excess  there  is  of  quick  assets 
over  current  habihties,  what  the  proportion  is,  and 
what  the  net  worth  is.  Most  of  the  necessary  questions 
for  an  ordinary  busmess  are  on  the  forms  shown  in 
Chapter  VI.  It  is  mipossible,  however,  to  make  up 
one  form  which  will  cover  all  classes  of  business  and 
not  leave  something,  perhaps,  to  be  desired.  When 
these  special  problems  come  up,  the  bank  necessarily 
has  to  make  even  a  more  rigid  inquiry. 


I        1 


Hi 


hi 


V' 

i 
h 


I    .'ti 


122 


ANALYZING  CREDITS 


fact,  the  concern  sending  in  the  statement  has  under 
discount  a  considerable  line  of  customers*  paper,  which 
is  a  contingent  liability  until  it  is  paid  by  the  customer 
or  by  the  concern  itself,  for  customers  do  not  always 
pay.  Paper  of  this  kind,  originally  taken  for  overdue 
accounts,  if  renewed  often  and  then  shifted  from  one 
bank  to  another,  would  be  Usted  as  ''notes  payable," 
since  it  has  become  an  actual  and  no  longer  a  con- 
tingent liability.  When  a  company  has  obligated 
itself  on  stock  subscriptions,  on  indorsements  for 
the  benefit  of  others,  on  guarantees  to  make  good  any 
defects  on  contract  work  or. goods  sold,  on  purchase 
contracts  for  future  delivery,  on  various  kinds  of 
bonds,  and  so  on,  the  banker  should  know  it.  Further- 
more, when  the  obligations  are  somewhat  large, 
reserves  should  be  estabhshed  to  meet  the  probable 
contingencies  which  might  arise. 

Under  ''notes  payable"  the  borrower  should  be  asked 
to  "state  the  maximum  amount  borrowed  from  all 
sources  during  the  fiscal  year  just  closed"  because 
most  concerns  close  their  books  and  make  up  annual 
statements  between  seasons  when  their  business  is 
employing  the  least  or  no  borrowed  money,  thus 
presenting  the  best  figures.  The  proportion  of  "quick " 
assets  and  Habilities  changes  perceptibly  when  firms 
are  carrying  maximum  liabilities. 

Consequently,  there  is  sufliicient  justification  for  the 
banker  to  ask  many  questions  if  he  is  going  to  deter- 
mme  accurately  what  excess  there  is  of  quick  assets 
over  current  Habilities,  what  the  proportion  is,  and 
what  the  net  worth  is.  Most  of  the  necessary  questions 
for  an  ordinary  business  are  on  the  forms  shown  in 
Chapter  VI.  It  is  impossible,  however,  to  make  up 
one  form  which  will  cover  all  classes  of  business  and 
not  leave  something,  perhaps,  to  be  desired.  When 
these  special  problems  come  up,  the  bank  necessarily 
has  to  make  even  a  more  rigid  inquiry. 


Tt 


INSERT  VI 


'       1 


il 


REDUCTION 


RATIO 


14:1 


->!^ 


•»    •!■ 


I         •  >    , 


^. 


a^ 


^^y^. 

^^^Y^ 


<^: 


3 

3 


■''$'. 


^. 


Caj 

CX) 

^ 

O 

CJl 

cn 

3 

3 

3 

3 

3 

3 

> 

Q) 

DD 

O  > 

S-ro 

Q)  O 

O  >> 

^o 

o  m 

CD  O 

toX 

GHIJKLM 
dmnopqr: 

3l 

H- » 3*  r~ 

IJKLM 
nopqn 

KLM 
ijkIm 
2345 

in  -7 

J^Z 

a^3  z 

OPQRS 
jvwxyz 

^o 

^  o  o 

TUVW 
12345 

STUVW 
Z12345 

RST 
stuv 

cr>x 

$cz 

CX)NI 

OiX 

X  < 

o 

OOM 

N   < 

VO 

X 

O 

rsi 

.a^ 


> 

4k 


^.^' 

^7^^ 

^^^7^ 


'^ 


3 
3 


^ 


#p 


^<ij^, 


'S'. 


S 


is  Is  Is  |g 


o- 


5  IS 


In 


2.0  mm 


AaCOErQHIJKI.MNOI^)««STltVW)IVZ 
•lic<M<irN|MmnDmrMu««nvrl734M't<IO 


ABCDEFGHIJKLMNOPORSTUVWXYZ 
abcdefghi|kimnopqrstuvwxyz  1 234567890 


ABCDEFGHIJKLMNOPQRSTUVWXYZ 

abcdefghijklmnopqrstuvwxyz 

12345678% 


^fo 


fp 


m 

O 

O 
"o  ES  "o 

>  C  CO 

I   ^   ^ 

m 

>! 

3D 
O 

m 


Afr 
'*  *^^ 


^,4 


^^^^. 


2.5  mm 


ABCDEFGHIJKLMNOPQRSTUVWXYZ 

abcdefghijklmnopqrstuvwxyz 
1234567890 


^O 


^ 


►-• 

M 

ro 

Ul 

O 

Ul 

3 
3 

3 
3 

3 
3 

Is 

3  ^ 


5° 
><  aj 

CT>X 

^-< 

00>VI 

o 


o  ^ 

fS 

Is 

3  ^ 

?i 

'^  ^^ 

'^  C/) 

-sl-< 

oorsi 


8 


A. 


OD 


*5  < 

X 

-< 

tsi 


ASSETS. 


Cash  on  Hand 
Cash  in  Bank 

Notes  Receivable  of  Customers 
Accounts  Receivable  of  Customers 
Merchandise,  Finished 
Merchandise,  Unfinished 
Merchandise,  Raw  Material 
Stocks,  Bonds  and  Investments 


TOTAL  QUICK  ASSETS 


Land 

Buildings 

Machinery  and  Fixtures 

Deferred 

Good  Will  and  Patents 

Stocks,  Bonds  and  Investments 


TOTAL  ASSETS 


Net  Worth 

Excess  Quick  Assets 

Proportion  of  Quick 

Net  Sales 

Gross  Profits 

Actual  Expense  of  Business 

Bad  Debts  Charged  Off 


No.  1 


1st  Year 


S 


100 


15,200 

76.000 

10,000 

8,000 


$109,300 


$  10,000 
23,000 
15,000 


2nd  Year 


$  3,000 

12.500 

64,000 

11,000 

9,000 


S  99,500 


$157,300 


$  10,000 
24,100 
16,000 

25,000 


$174,600 


54,000 
6,800 


No.  2 


1st  Year 


500 

12.000 

2,000 

20.000 

25.000 


2nd  Year 


$ 


$  59,500 


(103,000 

) 
30.000 

4.000 


1.500 
13.000 

1,000 

7.500 
22.000 

7.000 

10.000 


No.  3 


First 
Analysis 


$  62.000 


($120,000 

) 

30.500 

500 

4.000 


200 

1.200 
10.400 
15.000 
30.000 


$196,500 


$217,000 


$  56.800 


($40,000 

) 

2.000 


Second 
Analysis 


$    200 

1.200 
10.400 
15.000 
30.000 


35.000 


$  91.800 


35.000 


$133,800 


($40,000 

) 

2.000 


$133,800 


$  63.600* 
23,500 

120,000 


$102,500 
34.500 


$113,000 
2.000 

140.000 

70.000 

55.000 

1.000 


$93,800 
16.800 

1.421 


$93,800 
51.800 

2.291 


LIABILITIES 


Notes  Payable  for  Merchandise 
Notes  Payable  to  Own  Banks 
Accounts  Payable 
Accrued 


TOTAL  QUICK  LIABILITIES 


Mortgages  or  Liens  on  Real  Estate 


TOTAL 


Preferred  Stock 

Common  Stock 

Surplus,  including  U.  P. 

Reserves 


TOTAL  LIABILITIES 


No.  1 


1st  Year 


$  85.000 
17.500 


$102,500 


2nd  Year 


$  63.000 
13.000 


No.  2 


No.  3 


1st  Year 


$  86,000 
8,000 


$  76.000 


$102,500 


$  30.800 

27.000 

3.000 


$  10.000 


$  86.000 


$157,300 


$  30,800 
27,000 
30.800 


$  94.000 


2nd  Year 


$  61.000 
3.000 


First 
Analysis 


$  12.000 
18.000 
10.000 


$  64,000 


$  94.000 


$174,600 


$100,000 
2.500 


$196,500 


$  40.000 


$104,000 


$110,000 
3.000 


$217,000 


$  40.000 


$  40.000 


$  65.000 
28.800 


$133,800 


Depreciation 

Dividends 

Profits  to  Surplus 

Charges  Not  Applicable  to  Present  Ydkr 


700 


6.900 

6.600 

500 


Analysis 


$  12.000 
18.000 
10.000 


$  40.000 


$  4O.00D 


$  65.000 

28.1 


$133,800 


*Less  Good  Will 


**$17.000  of  this  is  Revaluation  of  Plant 


insert  VI:  Here  are  reproduced  three  statements,  each  covering  two  years, 
and  placed  side  by  side  for  analysis  and  comparison.  The  assets  are  shown 
at  the  right  and  the  liabilities  at  the  left.  Statements  of  varying  character 
often  bring  out  points  of  especial  value  to  the  banker,  thus  guiding  him  in 


making  credit  decisions.  The  question,  *  'What  is  a  borrower  worth?"  usually 
is  of  most  importance  to  the  credit  officer,  and  a  statement  alone  docs  not 
always  reveal  all  the  important  points.  Statements,  however,  often  show 
up  many  interesting  facts  by  contrast.    Comparisons  from  year  to  year  are 


of  ira\\ic  in  noting  the  progress  and  the  financial  ability  of  each  borrower. 
For  example,  note  in  division  number  1  the  increase  in  the  surplus  from  one  year 
to  the  next.  One  statement  alone  might  fail  to  reveal  an  important  develop- 
ment in  the  business.     Division  number  2  illustrates  the  necessity  of  keeping 


taD  on  the  depreciation  and  dividend  accounts.    Number  3 
for  a  careful  analysis  of  all  items.     For  instance,  stocks  and 
which  were  given  as  slow  assets  were  found  to  be  rcadSy 
credit  ratio  from  1.42  to  2.29.  Chapter  VIII  ezplMM^e  oaeof 


REDUCTION 


RATIO 


12:1 


CJI 

3 
3 


P  > 


p  =c 

p  tT 


o 


N> 

cr>x 
kj-< 

00  Nl 

o 


tn 

3 
3 


> 
CD 

o  m 


(DO 


^  o  o 
en 


X 

N 


X 

M 


^e 


A^ 


A^ 


,^'^'/ 

% 


<p 


a 


c*. 


o 

3 

i 


.'C^^ 


> 


8 

3 
3 


O 


CO 


a^ 


«  IS 


fo 


do 


In 


1.0  mm 


1.5  mm 


2.0  mm 


ABCDerGHIJKLMNOPQRSTUVWXY? 
•tlC(Mghitt>lmnopqrstuvw>y/ 1 234567890 


ABCDEFGHUKLMNOPQRSTUVWXYZ 
abcclefghijklmnopqrstuvwxy2l234567890 


ABCDEFGHUKLMNOPQRSTUVWXYZ 

abcdefghijklmnopqrstuvwxyz 

1234567890 


\&> 


k\r 


ABCDEFGHIJKLMNOPQRSTUVWXYZ 
abcdefghijklmnopqrstuvwxyz 
2.5  mm  1234567890 


V 


.«^ 


fe 


&: 


^ 


^0^ 


fcp 


^^ 


<>*<% 


^^. 


/^. 


^^:^A 


4^ 


'iy 


'^ 


m 

O 

o 

■o  m  -o 

>  C  u 

I  TJ  ^ 
0</)     ; 

m 

O 

m 


.***. 


>. 


'^^ 


^ 


^ 


•— • 

i\> 

Ul 

o 

r 

3 
3 

fi 


11 

<  ^ 

00  <^ 

8 


—  O 
3l 

^ 

if 

>**  (A 

rvir- 

^-< 


s 


^►^ 


ASSETS . 


Cash  on  Hand 
Cash  in  Bank 

Notes  Receivable  of  Customers 
Accounts  Receivable  of  Customers 
Merchandise,  Finished 
Merchandise,  Unfinished 
Merchandise,  Raw  Material 
Stocks,  Bonds  and  Investments 


TOTAL  QUICK  ASSETS 


Land 

Buildings 

Machinery  and  Fixtures 

Deferred 

Good  Will  and  Patents 

Stocks,  Bonds  and  Investments 


TOTAL  ASSETS 


No.  1 


1st  Year 


$ 


100 


15,200 

76,000 

10,000 

8,000 


S109,300 


$  10,000 
23 , 000 
15,000 


2nd  Year 


$  3,000 

12,500 

64,000 

11,000 

9,000 


No.  2 


1st  Year 


$   99,500 


$157,300 


10,000 
24,100 
16,000 

25 , 000 


$174,600 


500 

12,000 

2,000 

20,000 

25.000 


2nd  Year 


$  59,500 


(103,000 

) 
30,000 

4.000 


1,500 
13,000 

1,000 

7,500 
22,000 

7,000 

10,000 


No.  3 


First 
Analysis 


$ 


$  62,000 


($120,000 

) 

30,500 

500 

4,000 


$196,500 


$217,000 


200 

1,200 

10,400 

15,000 

30,000 


$  56.800 


Second 
Analysis 


200 

1,200 

10,400 

15,000 

30,000 


35,000 


$  91,800 


($40,000 

) 

2,000 


35 , 000 


$133,800 


($40,000 

) 

2,000 


$133,800 


Net  Worth 

Excess  Quick  Assets 

Proportion  of  Quick 

Net  Sales 

Gross  Profits 

Actual  Expense  of  Business 

Bad  Debts  Charged  Off 


54,000 
6,800 


63,600* 
23,500 

120,000 


$102,500 
34,500 


$113,000 
2,000 

140,000 

70,000 

55 , 000 

1,000 


$93,800 
16,800 

1.421 


$93,800 
51,800 

2.291 


LIABILITIES 


Notes  Payable  for  Merchandise 
Notes  Payable  to  Own  Banks 
Accounts  Payable 
Accrued 


TOTAL  QUICK  LIABILITIES 


Mortgages  or  Liens  on  Real  Estate 


TOTAL 


No.  1 


No 


1st  Year 


85 , 000 
17 . 500 


$102,500 


2nd  Year 


1st  Year 


$  63.000 
13.000 


$  86.000 

8.000 


$  76.000  U  1  94.000 


$102,500 


Preferred  Stock 
Common  Stock 
Surplus,  including  U. 
Reserves 


TOTAL  LIABILITIES 


30,800 

27,000 

3,000 


$157,300 


$  10.000 


$  86.000 


$  30.800 
27.000 
30 . 800 


f  94.000 


$100,000 
2.500 


$174,600 


$196,500 


Depreciation 

Dividends 

Profits  to  Surplus 

Charges  Not  Applicable  to  Present  Ydkr 


700 


{ 


*Less  Good  Will 


•♦$17,000  of 


each  covering  two  years. 
The  assets  are  shown 


insert  VI:     Here  are  reproduced  three  statements,   „ 

and  placed  side  by  side  for  analysis  and  comparison.  The  assets  are  shown 
at  the  right  and  the  liabilities  at  the  left.  Statements  of  varying  character 
often  bring  out  points  of  especial  value  to  the  banker,  thus  guiding  him  in 


making  credit  decisions.  The  question,  "What  is  a  borrower  wortn?"  usually 
is  of  most  importance  to  the  credit  officer,  and  a  statement  alone  does  not 
always  reveal  all  the  important  points.  Statements,  however,  often  show 
up  many  interesting  facts  by  contrast.     Comparisons  from  year  to  year  are 


of  v^alue  in  noting  the  progress  and  the  financial  ability  of  each  borrower. 
For  example,  note  in  division  nimiber  1  the  increase  in  the  surplus  from  one  year 
to  the  next.  One  statement  alone  might  fail  to  reveal  an  important  develop- 
ment in  the  business.     Division  number  2  illustrates  the  necessity  of  keeping 


caOOQ  the 

for  Acarefiil 

viudi  wue  pven  as  mm 

CI  edit  tttjo  frooi  1.42  tft 


ofaB 


«^ 


No.  1 


1st  Year 


100 


15,200 

76,000 

10,000 

8,000 


S109,300 


$  10,000 
23,000 
15,000 


2nd  Year 


$  3,000 

12,500 

64,000 

11,000 

9,000 


$  99,500 


$157,300 


$  10,000 
24,100 
16,000 

25 , 000 


$174,600 


54,000 
6,800 


63,600* 
23 , 500 

120,000 


No.  2 


1st  Year 


500 

12,000 

2,000 

20,000 

25 . 000 


2nd  Year 


$  59,500 


(103,000 

) 
30,000 

4.000 


$196,500 


1,500 
13,000 

1,000 

7,500 
22,000 

7.000 

10,000 


No.  3 


First 
Analysis 


$  62,000 


($120,000 

) 

30,500 

500 

4,000 


$ 


$217,000 


200 

1,200 

10,400 

15,000 

30,000 


$  56.800 


($40,000 

) 

2,000 


Second 
Analysis 


$ 


200 

1,200 

10,400 

15,000 

30,000 


35,000 


$  91,800 


35,000 


$133,800 


($40,000 

) 

2,000 


$133,800 


$102,500 
34,500 


$113,000 
2,000 

140,000 

70,000 

55 , 000 

1,000 


$93,800 
16,800 

1.421 


$93,800 
51,800 

2.291 


LIABILITIES 


Notes  Payable  for  Merchandise 
Notes  Payable  to  Own  Banks 
Accounts  Payable 
Accrued 


TOTAL  QUICK  LIABILITIES 


Mortgages  or  Liens  on  Real  Estate 


No.  1 


1st  Year 


TOTAL 


Preferred  Stock 
Common  Stock 
Surplus,  including  U. 
Reserves 


TOTAL  LIABILITIES 


$  85,000 
17,500 


$102,500 


2nd  Year 


63,000 
13,000 


$  76,000 


No.  2 


1st  Year 


$  86,000 
8,000 


$102,500 


30,800 

27,000 

3,000 


$  10,000 


$  86,000 


$157,300 


$  30,800 
27,000 
30.800 


$174,600 


$  94,000 


2nd  Year 


$  61,000 
3,000 


No.  3 


First 
Analysis 


$  64,000 


$  94,000 


$100,000 
2,500 


$196,500 


$  40,000 


$104,000 


$110,000 
3,000 


$217,000 


$  12,000 
18,000 
10,000 


$  40,000 


$  40,000 


$  65,000 
28,800 


$133,800 


Depreciation 

Dividends 

Profits  to  Surplus 

Charges  Not  Applicable  to  Present  Ydkr 


700 


6,900 

6.600 

500 


Second 
Analysis 


$  12.000 
18.000 
10.000 


$  40.000 


$  40.000 


$  65.000 
28,800 


$133,800 


♦Less  Good  Will 


**$17,000  of  this  is  Revaluation  of  Plant 


ach  covering  two  years. 

The  assets  are  shown 

Its  of  varying  character 

tr,  thus  guiding  him  in 


making  credit  decisions.  The  question,  ' 'What  is  a  borrower  worth?"  usually 
is  of  most  importance  to  the  credit  officer,  and  a  statement  alone  doc3  not 
always  reveal  all  the  important  points.  Statements,  however,  often  show 
up  many  interesting  facts  by  contrast.    Comparisons  from  year  to  year  arc 


of  value  in  noting  the  progress  and  the  financial  ability  of  each  borrower. 
For  example,  note  in  division  number  1  the  increase  in  the  surplus  from  one  year 
to  the  next.  One  statement  alone  might  fail  to  reveal  an  important  develop- 
ment in  the  business.    Division  number  2  illustrates  the  necessity  of  keeping 


tab  on  the  depreciation  and  dividend  accounts.  Number  3  points  out  the  need 
for  a  careful  analysis  of  all  items.  For  instance,  stocks  and  other  investments 
which  were  given  as  slow  assets  were  found  to  be  readily  marketaUe,  raising 
credit  ratio  from  1.42  to  2.29.  Chapter  VIII  explains  the  use  of  these  statt 


H 


WHAT  IS  THE  BORROWER  WORTH?        123 

Let  us  take,  for  example,  an  analysis  of  three  simple 
statements  (Insert  VI)  to  illustrate  many  of  the 
points  already  discussed : 

The  purpose  of  the  number  1  figures  is  to  demon- 
strate the  value  to  the  banker  of  comparing  statements. 
With  only  the  current  statement  on  hand,  the  question 
would  not  arise  as  to  the  source  of  the  surplus  of 
$30,800.  By  comparing  it  with  the  first  year,  however, 
we  find  that  good  will  and  patents  of  $25,000,  which 
does  not  pay  debts,  make  up  part  of  it,  and  there 
is  a  profit  to  the  surplus  of  $700.  Where  do  they  get 
$8,100  more  than  the  first  statement  shows?  The 
creditors  have  more  risk  in  this  business  than  the 
stockholders.  Quick  debts  ahnost  equal  quick  assets, 
and  the  mortgage  leaves  but  little  encouragement  in 
permanent  assets  A  comparison  of  the  buildings, 
machinery  and  fixtures  looks  as  if  repairs,  renewals, 
and  replacements  are  being  capitalized.  It  is  regarded 
as  imprudent  for  a  bank  to  make  a  loan  on  such  a 
statement  without  collateral  or  indorsements.  Even 
then  the  indorsements  of  people,  who  would  lend 
their  name  to  such  methods,  are  not  entitled  to  a 
great  deal  of  consideration. 

The  number  2  figures  demonstrate  the  value  of  a 
profit  and  loss  statement.  A  capital  statement,  as 
already  shown,  tells  you  only  half  the  facts.  This 
concern  actually  lost  money,  which  of  itself  is  no 
disgrace.  The  depreciation  of  $6,900,  however,  is  a 
farce,  as  it  is  on  inventory,  which  was  overvalued. 
This  concern  was  not  justified  in  paying  dividends. 
The  plant  is  marked  up  $17,000  and  not  depreciated. 
A  correct  statement  would  show  depletion  of  the 
capital  stock.  The  concern  improved  the  statement 
by  placing  a  mortgage  of  $40,000  on  the  property  and 
reducing  the  quick  debt  $30,000;  but  that  is  only  a 
shifting  of  the  obhgation.  Not  having  the  proper 
proportion  of  quick  assets,  it  received  accommodation 


1  *• 


(■ 


f 


124 


ANALYZING  CREDITS 


0 


i 


II 


on  the  indorsement  of  people  who  were  interested. 
Many  bankers  do  not  look  favorably  on  indorsements, 
which  are  usually  overrated  and  continue  indefinitely. 

The  first  analysis  showing  1.42  as  the  ratio  of  quick 
assets  to  liabilities  does  not  justify  loans,  but  the  2.29 
ratio  does.  After  the  first  analysis,  the  investments 
proved  to  be  really  high-class  stocks  and  bonds  listed 
on  the  stock  exchanges,  which  made  them  quick  assets. 

These  examples  show  the  simple  side  of  the  analysis 
problem.  The  credit  man  of  the  bank  should  go 
deeper,  however,  and  compare  cm-rent  figures  with 
those  of  previous  years.  Present  figures,  too,  should 
be  compared  with  the  statements  of  other  good  con- 
cerns in  the  same  line  of  business,  for  in  this  way 
the  bank  is  able  to  establish  an  elaborate  and  valuable 
volume  of  statistics  on — 

The  average  net  sales  per  $1  of  quick  assets,  per  $1 
of  working  capital,  and  per  $1  of  total  capital. 

How  net  sales  line  up  with  merchandise  on  hand, 
accoimts  receivable,  and  notes  payable. 

The  percentage  of  fixed  assets,  of  habilities,  of  net 
worth. 

The  percentage  earned  on  net  sales,  on  capital  stock, 
on  working  capital,  and  on  true  net  worth. 

It  is  also  desirable  to  establish  the  liquidatmg  values 
of  accounts  receivable  and  merchandise  in  different 
classes  of  business  so  that  the  proper  proportion  of 
quick  assets  for  each  Une  of  business  may  be  easily 
judged.  Thus  the  banker  can  have  figures  at  his 
elbow  which  will  help  him  to  get  at  the  root  of  a  con- 
cern's worth,  for  in  these  days  of  competition  it  is 
necessary  to  know  all  the  facts,  to  determine  every 
point  of  credit  in  order  to  make  loans  as  liberally  as 
possible  and  still  safeguard  the  bank. 


CHAPTER  IX 

WEIGHING  THE  PERSONAL  EQUATION  IN 
FARMER  CREDIT 

A  CERTAIN  country  bank  in  southern  Illinois  had 
charge-offs  of  nearly  $1,500  on  its  loan  account 
during  a  period  of  four  years,  and  yet  only 
$125  of  the  total  loss  was  due  to  poor  farm  risks. 
Loans  to  farmers,  in  fact,  made  a  credit  showing  of 
practically  100%. 

'*I  consider  farmers  among  the  most  potential  and 
valuable  customers  a  bank  can  have,"  says  the  cashier 
of  this  institution.  "I  have  proved  them  to  be  gilt- 
edged  risks.  There  is  no  reason  why  every  banker 
shouldn't  feel  the  same  way  about  lending  to  them, 
provided,  of  course,  he  uses  the  same  good  judgment 
and  caution  in  granting  a  farmer's  application  that  he 
does  in  lending  to  others.  The  trouble,  as  I  see  it,  has 
been  that  bankers  have  failed  to  give  the  necessary 
attention  to  the  subject  of  loans  to  farmers.  I'm 
satisfied  with  my  experience  and  see  no  reason  why  I 
shouldn't  increase  my  business  from  this  source." 

Investigation  shows  that  the  opportimities  many 
banks  have  for  serving  the  farmer  are  almost  unlimited. 
The  farm  business  of  the  country  has  been  going  ahead 
at  a  tremendous  rate.  Yet  the  credit  of  the  farmer  has, 
it  seems,  continued  to  be,  in  some  sections  at  least, 
a  more  or  less  uncertain  quantity.  In  numerous  com- 
munities there  has  been  what  might  almost  be  called 
an  antipathy  toward  lending  farmers  money.  Not 
only  because  the  notes  usually  were  issued  to  run  for 

125 


126 


II 


Ji'! 


1 

I ;. 


w 


\\i 


ANALYZING  CREDITS 


a  long^erm,  but  because  it  seemed  difficult  to  appraise 
the  farmers'  financial  standing  accurately. 

Now,  however,  fann  loans  are  growing  rapidly  in 
favor.  Farmers  are  seeing  more  clearly  the  necessity 
of  handling  their  finances  on  a  definite  basis  and  many 
of  them  are  able  to  show  their  bankers  why  they  are 
entitled  to  temporary  loans  the  same  as  the  merchant 
or  manufacturer.  For  this  reason  the  banker  in  a 
farming  conmiunity  should  be  quick  to  respond  to  the 
credit  needs  of  these  customers.  Some  of  the  most 
prosperous  smaller  banks  of  the  country  have  grown 
so  because  they  discovered  in  advance  of  their  com- 
petitors the  value  of  the  farmer  as  a  personal  risk. 

Since  the  Joint  Stock  Land  Bank  was  estabhshed, 
bankers  have  an  additional  incentive  to  encourage 
farmers'  business,  because  the  bugbear  of  tying  funds 
up  for  a  long  time  in  farm  risks  has  been  dissipated. 
The  farmer  can  get  his  long-term  accommodations 
from  the  Joint  Stock  Land  Bank  as  pointed  out  in 
the  volume  of  this  series  on  loans  and  discounts,  and 
he  can  thus  feel  more  free  to  approach  his  home  banker 
for  temporary  needs.  The  banker  in  turn  has  his 
funds  Hquid  for  investment  in  short-term  paper  so 
that  he  can  easier  take  care  of  the  farmer's  temporary 
needs.  Therefore  the  outlook  for  increased  lending  to 
farmers  could  hardly  be  more  encouraging. 

Yet  farm  loans  often  have  no  more  significance  to 
some  bankers  than  ordinary  mortgage  or  cattle  paper. 
These  types  of  loans  are  fully  described  in  the  volume 
on  loans  and  discounts.  In  the  following  pages, 
however,  we  will  consider  the  farmer  in  his  newer 
relations  with  the  bank  as  purely  a  commercial  risk — 
a  personal  borrower — just  as  the  merchant  borrows  on 
his  line  of  credit.  Certainly  the  ideas  brought  out 
will  suggest  ways  to  increase  or  take  on  this  type  of 
business  to  reap  benefits,  like  the  banker  mentioned 
at  the  beginning  of  this  chapter  has  gained. 


DEVELOPING  FARMER  CREDIT 


127 


(( 


We  take  care  of  farmers  who  wish  to  borrow,  just 
as  we  do  the  ordinary  business  man,"  says  a  Michigan 
banker.  **  After  careful  inquiry  and  investigation, 
we  'lend  them  on  their  own  responsibility  when  we 
consider  them  good. 

.  '*We  use  an  agricultural  credit  statement  to  help 
us  to  get  at  a  farmer's  true  net  worth,  and  we  try  to 
have  each  appUcant  understand  that  every  other 
farmer  must  fill  out  one  of  these  blanks  in  order  to 
obtain  a  line  of  credit.  In  other  words,  there  is  no 
partiaUty  or  no  distrust  of  any  one  farmer.  Each  has 
the  opportunity  to  establish  a  regular  business  line  of 
credit  if  he  is  worthy.  We  find  that  our  farmers  have 
a  sense  of  real  pride  in  being  on  the  same  plane  with 
other  business  men.  They  like  to  know  that  the 
banking  Une  of  demarkation  between  the  city  man  and 
the  farmer  is  disappearing  so  far  as  purely  commercial 
risks  are  concerned.  The  way  we  have  put  the  necessity 
for  statements  and  financial  facts  up  to  our  farmers 
has  really  flattered  them.  They  appreciate  the  service 
we  are  giving  them  as  a  mark  of  recognition  of  their 
worth.  There  is  no  reason  why  all  farmers  who  are 
entitled  to  credit  could  not  be  made  to  see  the  banker's 
attitude  in  the  right  light.  We  have  an  idea  that  it 
is  simply  up  to  the  banker — with  his  broad  vision  and 
knowledge  of  finance — to  show  the  farmer  the  path  to 
real  cooperation  between  himself  and  the  bank." 

The  statement  used  by  this  banker  is  reproduced  in 
Figure  39.  He  has  had  practical  and  profitable  success 
in  getting  financial  histories  of  farmers  in  this  way. 


TAKING  THE  BAD  LOSS  BUGABOO  OUT  OF  FARM  LOAN 
BUSINESS  OFFERS  INTERESTING  POSSIBILITIES 

Another  banker  located  in  Illinois  uses  a  card 
record  (Figure  40)  to  supplement  the  statement. 
This  card,  front  and  reverse,  gives  at  a  glance  a  sum- 
marized analysis  of  ihe  farmer's  worth  as  a  credit 


li 


i| 


AGRICULTURAL  CREDIT  STATEMENT 

CONnDENTIAL 


Name. 


.To. 


Bank 


Addren. 


For  the  purpose  of  obtaining  a  line  of  credit  with  you  not  to  exceed  $. 


.,  I  tender 


the  followinf  at  a  true  and  accurate  ■tatetncnt  of  my  farming  buainen  on 

and  agree  to  notify  you  promptly  of  any  change  affecting  my  ability  to  pay.  I  ahall  uie  this 
loan  for  the  following  purpoees: 


ASSETS 
CPropcrty  owned  by  undcnifMd) 

LIABILITIES 
(Debts  of  undersigned) 

Coah  ia  bank  and  oo  hand 

NoUatehMk 

•Votes  to  otbcrv 

Accounts  due  to  mc.  good 

Aocounu  payable  (store,  aad  w  fortld 

bonds,  and  lo  forth) 

Other  debts 

Notes  sad  accounts  owed  to  me 
an<   past  due, 

Mnrtgagi  i  on  real  estate  total 

(face  vahic  $                 )  cMh  value 

Chattel  oiartiaces,  judgments,  or  liens 
total  O'st  on  reverse  side) 

• 

Keal  estate  total  selling  value 
(list  on  reverse  jide) 

Machinery  and  tools  total  selling  value 
(list  oo  reverse  side) 

Live  stock  total  selling  value 
Oist  on  reverse  side) 

Tbtal  LlaWHtitt 

Total  Aasets 

Net  Worth 

I  am  indorser  for. 


.Amount  $_ 
-Amount  $. 


I  carry  $. 


.life  insurance  payable  to. 


Cash  vahac  $. 
I  carry  $ 


.fire  Insurance  payable  to. 


Other  insurance. 
References 


Date. 


Signature 


Figure  39:  One  banker  who  has  developed  a  profitable  farm  loan 
business  uses  this  statement  to  get  at  the  applicant's  real  worth.  It  is 
difficult  for  many  farmers  to  submit  a  satisfactory  statement,  but  this 
form  is  gotten  up  so  simply  that  the  applicant  usually  has  no  trouble 

128 


ASSETS 
Notes  and  Mortgages  Due  to  Me 

Br  Whom 

For  What 

When  Due 

Amount 

Mm-m 

lAnrtVMfM  _    , 

IudfffTk?nt« 

Total 

Real  Estate 

Dtacfiptioo 

Location 

Cultivated 
Acres 

Total  Selling    Assessed 
Value             Value 

Total 

Inventory  of  Other  Properly 

Jan.  1.19      IJaa.  1.  It      | 

Jan.  1.19      |J 

Ian.  1.  19 

No. 

Value 

No. 

Value 

No. 

Value 

No. 

Value 

rM»u 

HM.M 

Manurr  Spread 

rr 

.Milking  Machine 

Com  Plante* 

Pmittry  ._ 

Feed*  «hd  Other  Suf>ol>»> 

Potato  Digger 

Pntatn  Plfnln-     ._ , 

Total 

Carried  Forward 

Increase  or  Decrease  $ 

LIABILITIES 

Notes  and  Mortgi«c*  Which  1  Owe 

To  Whom 

For  What 

When 
Due 

Anwunt 

Int. 
Rate 

Int   Pd. 

to  what 

date 

Original 

Still  Unpaid 

N<«n 

Mfrr*»'M 

lurfvnimt* 

Total 

OPERATING  ACCOUNT 


Receipts  (last  year)  Milk.  Butter,  Bggs,  Poultry, 
Live  Stock,  Crops,  and  ao  forth 

Espcaaea  (last  year) 

I.«hnr                    $ 

Brmight  (<y'd  % 

$ 

Hirfd  Tranif  $....... 

1 

*■ 

c 

t 

SMd                            $ 

< 

T.MM                           f 

rsrrHf  <<>r'<<  K 

Tn*.l  S 

fmTTir^^  fnrM   t 

Tnt.lt 

RECEIPTS  LESS  EXPENSES        $                  || 

TUa  credit  ahcct  is  to  be  made  in  duplicate,  one  copy  to  be  retained  by  the  maker 


in  filling  it  out  correctly.  The  reverse  (shown  above)  is  espetnally  in- 
teresting. The  assets  and  liabilities  are  set  forth  so  that  the  applicant 
need  not  be  embarrassed  by  asking  questions.  This  banker  says  he 
has  little  or  no  difficulty  in  judging  the  risk  from  this  statement. 


129 


). 


m 


130 


ANALYZING  CREDITS 


risk  and  the  amount  of  loans  granted.    Filed  alpha- 
betically it  is  of  striking  value  in  judging  these  credits. 

As  a  matter  of  fact,  lack  of  some  such  arrangement 
has  been  one  of  the  greatest  weaknesses  in  the  farm 
credit  situation.  Bankers  have  in  many  instances 
based  their  loans  to  farmers  on  their  own  personal 
estimate  of  the  appHcants,  with  too  Uttle  knowledge  of 
actual  farming  conditions.  A  statement,  however, 
helps  the  banker  to  chart  the  credit  worth  of  a  farmer's 
business  and  offers  facts  and  figures  to  supplement  the 
estimate  already  placed  on  the  applicant's  capacity 
and  character  in  a  more  accurate  manner. 

An  eastern  banker  uses  a  statement  similar  to  that 
akeady  described  and  reproduced  on  page  173  of  the 
volume  on  loans  and  discounts,  and  finds  it  most 
effective  for  handhng  short-term  loans  to  farmers.  It 
automatically  raises  the  standard  of  bookkeeping 
among  farmer  customers,  which  is  an  important  factor 
in  putting  farming  on  a  business  basis.  No  progressive 
bank  is  likely  to  overlook  a  profitable  field  of  business 
and  it  has  been  the  backwardness  with  which  many 
farm  owners  have  handled  their  bookkeeping  that  has 
made  it  impossible  for  some  bankers  to  make  much 
headway  in  building  up  a  profitable  farm  loan  business. 
To  this  end  plans  have  been  fostered  by  banks  hke 
that  described  in  the  chapter  on  how  to  increase  the 
farmer's  borrowing  power  in  the  volume  on  loans  and 
discounts.  Banks,  of  course,  do  not  want  to  overlook 
any  good  business,  and  that  is  why  they  are  going 
more  deeply  into  the  farm  loan  problem. 

One  banker  has  extended  his  business  among  farmers 
by  encouraging  them  to  become  his  regular  customers, 
even  if  only  in  a  small  way.  He  has  urged  each  one 
to  open  a  checking  account,  a  move  too  many  farmers 
fail  to  make  as  soon  as  they  should.  This  enables  the 
bank  to  size  up  the  customer's  abihty  and  methods  of 
financing.    The  oflScers  can  more  easily  get  acquainted 


/^ 


DEVELOPING  FARMER  CREDIT 


131 


with  him.  Thus,  when  he  wants  a  loan  they  are  in 
close  enough  touch  with  him  to  tell  whether  his  request 
deserves  favorable  consideration.  Getting  acquainted 
in  this  way  enables  the  banker  to  talk  frankly  with  the 
farmer  about  his  affairs.  The  two  meet  on  common 
ground  in  their  business  transactions. 


Date 
Due 


Number 


Amount 


I  I  I  I  I 


Date 
Paid 


Date 
Due 


Numt>er 


Amount 


I'll' 


Date 
Paid 


Name 


Date 


Business 


Residence 


P.  O.  Address 


Real  e«tr.te  owned 


Value 


$ 

r~ 

Slow? 

Very  slow  ? 

Honest  ? 

Less  encumbrance  to 

Good  manager? 

Net  value 

Habits? 

Personal  property 

% 

Less  outside  debts 

Total  net  worth 

$ 

Insurance  carried  ? 

Any  chattel  mortgages  ? 


Liability  as  indorser 
Remarks 


Figure  40 :  An  Illinois  bank  has  overcome  the  difficulty  of  getting  ac- 
curate farm  credit  information  by  classifying  these  risks  as  shown 
(front  and  reverse).  Notice  how  the  important  details  are  emphasized. 

Here  is  one  of  the  points  to  keep  in  mind  in  handhng 
the  rural  customer.  It  is  pretty  difficult,  investigation 
shows,  to  get  at  an  applicant's  financial  strength  while 
still  preserving  a  distant  attitude  that  causes  .the 
farmer  to  close  up  like  a  clam.  And  the  farmer  often 
is  just  sensitive  enough  to  resent  this  aloofness.  A 
banker  can  be  dignified  and  yet  still  be  approachable. 
If  he  deals  with  his  farmer  customer  in  a  friendly  way 
he  will  then  feel  no  hesitation  in  asking  him  for  a 
statement  of  his  financial  affairs,  for  a  mutual  under- 
standing will  already  have  been  established. 


132 


ANALYZING  CREDITS 


DEVELOPING  FARMER  CREDIT 


133 


I  1 


i<' 


■  :t 


:!«!l 


^i 


Hrj 

;  I  I  i 


'!i 


"My  own  experience  as  cashier  of  a  country  bank," 
says  a  Missouri  banker,  '*is  that  a  statement  can 
readily  be  obtained  provided  care  is  taken  to  impress 
upon  the  customer  the  importance  of  such  a  statement 
and  the  advantage  there  is  to  him  personally  in  giving 
it.  It  is  no  trouble  to  convince  the  average  man  that 
it  is  far  better  for  the  bank  to  get  its  knowledge  of  his 
financial  condition  from  him  direct  than  from  outside 
sources.  And,  once  the  statement  is  given,  it  almost 
invariably  works  out  that  the  borrower  is  bound  more 
closely  as  a  customer,  because  he  knows  the  bank  is 
now  completely  informed  as  to  his  condition  and  can 
and  will  take  care  of  him  according  to  his  needs.  I 
never  had  a  refusal  where  a  good  statement  could  be 
made  and  I  never  came  across  a  serious  misrepre- 
sentation from  my  farmer  customers." 

The  Farmers  and  Merchants  State  Bank,  of  Decatur, 
Ilhnois,  reaches  some  farmers  and  enlarges  its  list  of 
customers  satisfactorily  by  cooperating  with  local  grain 
buyers.  A  nxmiber  of  the  farmers  in  that  community 
who  raise  crops  to  sell  to  the  grain  buyers  often  wish 
some  money  in  advance.  This  usually  takes  more 
capital  than  the  grain  men  can  furnish.  To  help  the 
farmer,  therefore,  the  grain  buyer  takes  his  note  for 
the  amount  he  wants  in  advance,  indorses  it,  and  then 
gives  it  back.  The  farmer  then  comes  to  the  bank  and 
discounts  the  note.  He  has  the  alternative  of  taking 
the  amount  of  the  note  in  cash  or  opening  an  account 
and  leaving  on  deposit  all  or  part  of  the  total  simi. 

The  bank  thus  is  advancing  its  funds  on  desirable 
two-name  paper.  The  plan  is  especially  profitable 
because  it  brings  the  farmers  into  the  bank  and  tends 
to  make  them  permanent  customers.  Besides,  it  gives 
them  the  best  sort  of  acquaintanceship  with  banking 
methods.  They  become  familiar  with  the  bank's 
pohcies  and  quickly  see  the  value  of  careful  financing 
and  of  building  up  individual  credit. 


John  R.  Pogue,  the  president,  says  that  considerable 
business  has  resulted  from  the  plan.  Aside  from  the 
new  customers  obtained,  the  proposition  is  worth 
while  from  the  standpoint  of  putting  idle  funds  to  work 
and  the  bank  is  safeguarded  by  having  the  grain 
buyer's  indorsement  on  the  notes.  Thus,  if  a  farmer 
encounters  misfortune  the  grain  buyer  stands  ready 
to  make  good  the  amount  borrowed. 

Most  bankers  agree  that  there  should  be  no  dis- 
tinction between  the  interest  rates  to  farmers  and 
those  to  business  men.  All  conditions  otherwise  being 
equal  the  basis  for  charges  is  just  the  same. 

IS  THE  OWNER  OF  A  FARM  ALWAYS  A  SAFER 
RISK  THAN  THE  RENTER? 

One  question  of  importance  that  sometimes  arises 
in  considering  the  granting  of  credit  to  farmers  is 
where  to  draw  the  fine  between  the  owner  and  the 
renter.  How  nearly  should  the  renter  approach  the 
owner  in  receiving  credit  accommodation?  Usually, 
investigation  shows,  the  owner  of  a  farm  has  the 
advantage  at  the  bank.  On  the  other  hand,  a  level- 
headed renter  may  at  times  obtain  a  larger  line  of 
credit  than  an  owner  who  is  careless  with  his  finances. 
If  conditions  are  favorable,  many  bankers  have  no 
hesitancy  in  making  short-term  loans  to  renters — that 
is,  on  90-  to  180-day  notes.  But  to  do  this  the  officers 
must  know  completely  the  essential  facts  about  the 
borrower.  There  can  be  no  guesswork  or  mere  personal 
opinion  in  financing  of  this  kind. 

If  the  borrower  is  a  regular  customer  of  the  bank, 
the  officers  frequently  can  get  a  good  line  on  his 
operations  by  watching  the  fluctuations  in  his  bank 
balance.  A  complete  personal  file  like  that  described 
in  Chapter  I  also  helps.  In  fact,  the  notations  of  a 
personal  nature  thus  recorded  may  have  an  important 
bearing  on  the  safety  of  a  bank's  credits.    For  instance, 


M. 


0 

f 


•I* 


134 


ANALYZING  CREDITS 


iiH 


It-,"* 


one  bank  was  saved  from  expensive  litigation  by  having 
on  file  the  memorandum  concerning  a  payment  made 
six  years  previous  on  a  transfer  of  a  piece  of  real 
estate.  The  rough  notes  on  the  transaction  proved 
better  evidence  than  the  entry  made  on  the  cash  book. 
The  case  was  never  carried  beyond  the  justice  court. 

Another  bank  keeps  a  personal  file  of  this  sort  in 
alphabetical  folders  so  that  at  any  time  its  officers 
can  size  up  the  credit  possibilities  of  any  farmer  in  the 
community,  whether  a  borrower  or  not.  Each  indi- 
vidual farmer  has  qualities  of  capacity  and  character 
to  consider  different  from  every  other  one.  It  is  only 
by  havmg  every  possible  fact  about  this  type  of 
borrower  that  the  banker  can  proceed  safely  in 
granting  a   line   of  credit. 

Knowing  the  facts,  bankers  are  able  to  lend  with- 
out security  to  responsible  farmers  $100,  S200,  $400, 
or  even  more  temporarily  to  buy  stock  or  new  equip- 
ment, to  help  harvest  crops,  or  to  meet  any  other 
legitimate  business  needs.  *'As  a  rule,"  comments  a 
middle-western  banker,  '*  worth-while  farmer  customers 
are  conservative  and  do  not  ask  for  a  cent  more  than 
they  actually  require,  for  they  do  not  want  to  meet 
any  unnecessary  interest  payments.  Personally,  I 
consider  farm  loans  on  the  whole  to  be  better  than 
any  other  credit  investment  we  can  make.  Of  course, 
the  best  loan  officer  will  sometimes  make  a  mistake! 
We  make  one  sometimes.  However,  our  losses  on 
loans  to  farmers  have  been  almost  negligible." 

''If  a  farmer  is  detained  unavoidably,"  adds  this 
banker,  "we  do  not  expect  him  to  travel  miles  to 
town  to  take  care  of  his  interest  or  his  renewal.  We 
know  he  will  appear  at  the  eariiest  possible  moment." 
To  sum  up,  every  bank  in  a  farm  community  can 
probably  widen  its  farmer  business  by  developing 
these  customers  into  safe  personal  risks  and  giving  all 
who  are  financially  worthy  a  definite  line  of  credit. 


I 


CHAPTER  X 
HOW  MUCH  TO  LEND  TO  FARMERS 

TO  what  extent  should  the  banker  grant  credit  to 
farmers?  This  question,  perhaps,  is  still  open  to 
argument.  Bankers  in  different  sections  of  the 
coimtry,  because  of  local  conditions,  may  rightly  have 
somewhat  different  restrictions  on  loans  of  this 
character.  Yet,  generally  speaking,  the  opportunity 
to  serve  the  farmer  borrower  is  fairly  similar  every- 
where. And  this  opportunity  does  not  always  stop 
with  the  lending  of  a  few  hundred  dollars  to  a  respon- 
sible owner  or  renter.  It  goes  sometimes  far  beyond 
that  simple  service  to  actually  refinancing  a  borrower 
just  as  the  city  banker  sometimes  finds  it  necessary 
and  advisable  to  refinance  one  of  his  customers. 

This  chapter,  therefore,  will  recount  not  only  some 
of  the  ways  in  which  bankers  have  lent  money  profit- 
ably to  their  farmer  borrowers,  but  also  one  or  two 
instances  of  how  they  have  extended  their  credit 
facilities  to  refinance  a  capable  customer.  The  ideas 
set  forth  should  indicate  particularly  to  country 
bankers  the  possibilities  within  their  grasp  to  widen 
their  influence  profitably  and  to  render  at  the  same 
time  a  real  service  to  the  community.  Progressive 
bankers  serve  farmers  somewhat  according  to  the  way 
they  size  up  these  customers  in  their  own  environ- 
ment. In  other  words,  a  country  banker  who  wants 
to  make  the  most  of  his  opportunities  for  business 
will  not  judge  a  farmer's  capabiUties  and  financial 
responsibiUty  simply  by  contact  inside  the  bank. 

135 


t 


B: 


I 


^' 


I''  ' 


M: 


«a 


If 


136 


ANALYZING  CREDITS 


"I  make  it  a  point  to  go  out  and  talk  to  our  farmer 
customers  on  their  own  ground  where  usually  they 
feel  more  free  to  tell  about  what  they  are  doing  than 
they  probably  would  be  in  the  bank,"  says  one  banker. 
"If  I  find  that  a  farmer  is  attentive  to  his  duties  and 
shows  good  business  abiUty,  I  will  lend  him  what  he 
needs  in  small  instahnents,  even  though  he  may  be  a 
renter.  In  fact,  sometimes  a  renter  who  is  a  partic- 
ularly careful  business  man,  may  be  a  better  risk  than 
the  man  who  owns  a  farm  and  does  not  know  how  to 
run  it.  For  instance,  if  in  talking  to  a  man  I  find  that 
he  is  more  interested  in  baseball  than  he  is  in  his  farm, 
I  will  be  pretty  careful  about  lending  him  any  money, 
even  if  he  does  happen  to  be  the  owner.  Sometunes 
owners  have  had'  their  farms  left  to  them  and  may 
not  be  practical  workers  themselves.  A  thrifty  renter, 
however,  may  often  be  a  valuable  customer." 

To  prove  his  point  the  banker  cited  the  example  of  a 
renter  who  asked  him  for  a  loan  to  purchase  a  tractor. 
This  farmer  had  for  several  years  been  diligent  and 
fairly  successful,  but  he  had  not  gotten  to  the  point 
where  he  could  purchase  a  farm  outright,  although  he 
was  earning  good  profits.  He  farmed  very  systemati- 
cally and  had  worked  out  a  number  of  tables  for  infor- 
mation secured  from  the  state  experiment  station  to 
show  just  what  he  could  do,  and  what  he  could  save  by 
using  a  tractor.  He  brought  his  figures  to  the  banker 
and  convinced  him  that  he  could  save  enough  in 
wages  and  in  horse  feed  to  pay  for  fully  50%  of  the 
tractor  during  the  season;  and  the  other  50%  as  soon 
as  he  had  received  his  income  from  the  crops. 

The  banker  had  a  fairly  complete  record  of  the 
applicant's  progress  and  knew  that  he  could  be 
depended  upon.  The  farmer  got  the  loan,  which  he 
paid  according  to  his  promise.  Another  instance  of 
how  progressive  country  bankers  size  up  credits 
comes  from  the  Middle  West. 


HANDLING  FARMER  BUSINESS 


137 


A  farmer  had  bought  150  acres  of  land  and  had 
made  a  payment  of  $5,000  down.  The  remainder 
was  to  be  paid  in  yearly  instalments  of  $500,  the 
seller  of  the  farm  having  accepted  the  buyer's  note  on 
that  basis.  But  the  new  owner  had  used  all  of  his 
available  cash  to  make  the  first  payment  on  the  farm 
and  did  not  have  the  money  on  hand  at  the  start  to 
pay  his  help. 

Although  he  had  just  come  into  the  community  and 
was  unknown  to  the  banker,  he  visited  the  bank  at 
the  beginning  of  the  season  and  became  acquainted. 
He  asked  to  borrow  $75  a  month  for  the  fom*  busy 
simmier  months  in  order  to  take  care  of  his  payroll. 
In  answer  to  the  banker's  questions  he  explained 
exactly  how  much  he  had  paid  on  the  farm  and  proved 
that  he  owned  all  his  equipment ;  he  also  told  the  banker 
he  thought  he  would  be  able  to  pay  all  of  the  four 
notes  as  soon  as  his  crops  were  sold. 

ANOTHER  INSTANCE  OF  WHERE  THE  BORROWER'S  CHARACTER 

FORMED  THE  BASIS  OF  CREDIT 

The  banker  at  first  hesitated  chiefly  for  two  reasons: 
First,  the  farmer  was  practically  a  stranger  to  him, 
although,  of  course,  it  would  be  a  simple  task  to  check 
him  up;  second,  the  applicant's  method  of  paying  for 
the  farm  in  instalments  on  a  personal  note  might, 
in  case  of  an  emergency  result  in  two  conflicting 
demands  on  the  farmer's  resources,  that  of  the  indi- 
vidual noteholder  and  that  of  the  bank  itself. 

So  the  banker  asked  this  applicant  to  wait  a  day  or 
two  to  give  him  time  to  think  it  over.  He  then  care- 
fully investigated  the  man's  previous  farming  experi- 
ence and  also  his  reputation.  Finding  that  his  industry 
and  efforts  in  the  past  were  good  and  that  he  bore  an 
excellent  reputation,  the  banker  in  this  instance 
finally  decided  to  help  the  farmer  to  meet  his  payroll. 
The    notes   were   simply    personal   and    carried  no 


f 


I 


li" 


138 


ANALYZING  CREDITS 


collateral  except  the  tangible  evidence  that  the  man 
was  going  ahead  with  his  crops  and  would  no  doubt 
make  a  fair  profit  at  the  end  of  the  season.  And  the 
banker  played  safe  because  he  knew  all  the  facts, 
which  in  the  final  analysis  were  favorable. 

In  the  Far  West  a  banker  received  an  application 
from  a  farmer  for  a  loan  of  $10,000  to  start  a  new 
herd.  This  farmer  was  in  good  financial  condition, 
owned  his  farm  and  had  plenty  of  equipment,  but  he 
wanted  to  go  into  the  breeding  of  pure  bred  live  stock, 
and  did  not  have  enough  cash  on  hand  to  start  off  as 
well  as  he  thought  he  ought  to.  He  explained  all  this 
to  the  banker.  He  did  not,  however,  have  down  in 
black  and  white  how  much  money  he  was  going  to 
invest.  In  fact,  he  confessed  that  he  was  not  sure  he 
would  require  the  full  amount  asked  for. 

The  banker  knew  this  man  to  be  a  successful  fanner 
and  was  willing  to  lend  him  the  amount  necessary  to 
establish  the  herd,  but  first  advised  him  to  check  up 
very  carefully  on  the  price  he  was  going  to  pay  for  the 
pure  bred  stock,  and  to  furnish  exact  figures  of  how 
much  money  he  would  require.  The  appHcant 
followed  the  instructions  to  the  letter  for  he  saw  the 
wisdom  of  the  banker's  advice.  The  banker  then 
lent  him  slightly  less  than  the  original  amount  and 
took  a  chattel  mortgage  on  the  herd,  which  is  cus- 
tomary practice  of  banks  in  making  cattle  loans. 
The  loan  ran  for  three  years,  and  was  paid  back  in 
instalments  that  came  due  twice  a  year.  In  this 
instance  the  banker  also  required  the  customer  to  take 
out  insurance  on  the  cattle  to  further  protect  the  paper. 

'^One  trouble  we  have  had  in  gaining  the  confidence 
of  farmers  and  helping  them  to  the  limit  has  been 
their  fear  that  we,  as  bankers,  were  trying  to  ^squeeze 
them  out  of  their  property,''*  declares  an  Iowa  banker. 
"Until  the  last  few  years,  it  is  undoubtedly  true  that 
speculative  and  unscrupulous  so-called  bankers  have 


HANDLING  FARMER  BUSINESS 


139 


operated  in  various  sections  for  the  express  purpose  of 
getting  valuable  pieces  of  farm  land  ridiculously  cheap. 
This  sort  of  banker,  however,  cannot  prosper  any 
more.  In  fact,  under  present  state  and  federal  regula- 
tions it  is  practically  impossible  for  him  to  operate  at 
all.  Therefore,  bankers  today  have  every  incentive  to 
get  closer  to  the  farmer  and  to  show  him  that  his  best 
interests  can  under  no  circumstances  be  other  than 
those  of  the  banker  himself  who  obviously  wants  his 
institution  to  grow  and  enjoy  the  confidence  of  the 
conmiimity.  It  requires  a  high  type  of  business  man 
to  be  a  successful  banker  now.  And  this  type  of  man 
in  the  country  bank  will  get  so  close  to  the  problems 
of  farming  that  he  will  see  legitimate  ways  of  refinancing 
farmers  who  become  involved  in  unexpected  financial 
diflSculties,  through  no  fault  of  their  own." 

To  illustrate  his  point  this  banker  told  how  he  had 
refinanced  several  farmers  successfully.  One  instance 
shows  how  far  he  goes  to  cooperate  with  his  customers. 
A  farmer  lost  25  cattle  by  drowning  when  they  broke 
through  the  ice  of  a  river  that  ran  through  his  prop- 
erty. Here  was  an  unforeseen  setback.  The  banker, 
however,  lent  him  the  money  to  replace  the  loss.  But, 
as  sometimes  happens,  accidents  do  not  always  come 
singly.  A  few  months  later  this  farmer's  biggest  barn 
burned.  While  he  had  insurance,  yet  it  was  not 
sufficient  to  cover  all  the  loss  of  time  involved  in 
rebuilding  and  taking  proper  care  of  the  stock  that 
had  to  be  replaced.  To  help  him  refinance  himself 
the  bank  granted  still  further  credit.  The  two  losses, 
of  course,  meant  a  serious  setback  to  the  farmer;  but 
he  was  able  eventually  to  find  himself  financially. 

On  the  other  hand,  unless  the  banker  was  sure  of 
Jiis  man,  it  would  have  been  folly  to  grant  him  credit 
in  the  two  emergencies.  Both  accidents  might  have 
been  due  to  carelessness.  A  careless  business 
fanner,  as  everyone  knows,  is  not  a  good  credit  risk 


I 


14(h 


ANALYZING  CREDITS 


ordinarily.  Investigation  in  this  case,  however, 
sho;^ed  an  entire  absence  of  carelessness.  And  so  it  is 
that  bankers  are  able  to  perform  innumerable  services 
for  farmers.  While  the  results  of  this  cooperation  in 
increased  profits  may  be  slow  of  realization,  they  are 
sure  and  permanent.  The  main  thing  is  to  make 
the  service  so  spontaneous  that  the  farmer  knows  it 
is  absolutely  sincere. 

In  this  direction  the  banker  can  increase  his  own 
business  and  help  the  farmer  to  gain  the  proper  line 
of  credit  for  his  needs  by  urging  him  to  follow  as 
nearly  as  possible  this  financial  program: 

1.  Own  only  good  productive  land. 

2.  Have  a  small  portion  of  your  farm  in  non-tillable  land. 

3.  Have  good  but  not  unduly  expensive  improvements. 

4.  Be  located  on  a  main  road  in  a  good  neighborhood  where  there 
are  many  other  good  farms. 

5.  Be  reasonably  near — two  to  six  miles — ^to  a  good  town. 

6.  Have  the  reputation  of  always  paying  your  debts  when  due. 

7.  If  possible,  ask  for  a  loan  that  will  be  45%  or  less  of  the  value 
of  the  land  alone. 

8.  Live  on  and  operate  your  own  farm. 

9.  Present  all  the  facts  just  as  they  are,  when  making  an 
application. 

10.  Never  let  your  taxes  run  delinquent. 

11.  Avoid  litigation — ^lawsuits. 

12.  Keep  your  name  off  of  notes,  bonds,  and  so  on. 

13.  Borrow  for  productive  purposes,  but  not  to  obtain  luxuries. 

14.  Deal  only  with  local  agents  known  to  be  honest  and  reliable. 

By  helping  the  farmer  to  understand  the  funda- 
mentals of  credit  then,  the  banker,  whether  large  or 
small  is  able  to  cooperate  with  him  to  the  limit. 
Thereby  he  gains  a  more  profitable  customer  and 
increases  his  own  opportunities  for  a  wider  and  a  more 
appreciated  service. 


PART  III 


FORTIFYING  YOUR  CREDIT 

POLICY 


••I 


CHAPTER  XI 


AUDITS  THAT  GUARD  AGAINST  LOSS 


a 


I 


» 


i 


An  eastern  bank  asked  the  head  of  a  perfumery 
J^L  concern  for  a  statement  of  its  condition.  It 
already  had  a  line  of  credit  amounting  to 
$25,000.  When  the  bank's  credit  ofl&cer  examined  the 
statement,  he  found  that  the  concern  was  carrying 
a  large  quantity  of  dead  stock  and  was  listing  among 
the  accounts  receivable  a  large  number  of  items  long 
past  due.  The  bank  was  unwilUng  to  keep  the  credit 
line  open,  until  it  knew  more  definitely  the  exact 
condition  of  this  customer's  affairs. 

Since  the  character  of  the  business  was  not  con- 
sidered among  the  so-called  staple  lines,  the  bank 
requested  an  audit  by  an  outside  certified  accountant. 
When  the  auditor  finished  his  work,  he  was  able  to 
furnish  a  concise  and  impartial  report  covering  the 
entire  activity  of  the  firm.  The  bank  then  called  in 
the  customer  and  induced  him  to  charge  off  a  large 
amount  of  past-due  accounts  and  reduce  the  stock 
that  had  been  on  the  shelves  for  a  long  time.  After 
this  was  done,  both  the  manufacturer  and  the  bank 
knew  exactly  where  they  stood,  and  the  bank,  fortified 
by  the  figures  produced  in  the  audit,  was  able  to  con- 
tinue financing  the  firm  with  less  danger  of  loss. 

This  illustrates  in  an  interesting  way  the  value  of 
the  outside  audit  in  determining  the  credit  risk. 

The  views  of  the  vice-president  of  a  national  bank, 
which  has  a  corps  of  auditors  under  the  direction  of 
the  credit  department,  sums  up  in  a  typical  way  the 

143 


!   •! 


144 


« 


N 


t 


^ 


PREVENTING  CREDIT  LOSSES 


attitude  of  other  bankers  who  recognize  the  system- 
atic audit  as  an  effective  instrument  in  safeguarding 
credits.  He  says:  "When  a  business  appears  to  be 
making  no  progress  as  indicated  by  a  comparison  of 
the  statements,  or  when  we  have  reason  to  believe 
that  a  concern  is  not  turning  its  stock  fast  enough,  or 
is  carrying  slow  past-due  accounts  as  Hve  assets,  it  is 
necessary  to  make  a  carefid  examination.  By  auditing 
the  books  we  can  ahnost  always  tell  if  the  business  is 
hampered  by  dry  rot  or  failure  to  make  a  proper  classi- 
fication of  the  records.  Ordinarily,  we  send  out  our 
own  auditors  to  look  over  the  books  to  determine  how 
affairs  stand,  but  as  a  rule,  they  do  not  undertake 
the  comprehensive  audit  of  a  certified  accountant. 

"The  reason  for  this  is  that  we  beheve  that  thorough 
audits,  to  be  of  genuine  value,  should  be  taken  during 
inventory  time  at  the  end  of  the  fiscal  year,  which  in 
the  majority  of  cases  is  around  January  first.  Should 
a  concern  justify  an  audit  at  this  time  we  recommend 
it  to  the  customer.  He  almost  always  comphes  and 
pays  for  the  expense  incurred.'* 

This  banker  says  that  in  the  many  detailed  audits 
which  have  been  made  as  a  result  of  his  advice,  the 
customers  have  almost  always  appreciated  the 
result,  since  it  enabled  them  to  put  their  finger  on  the 
weak  spots  in  their  business  and  to  stimulate  certain 
profitable  branches  of  the  work  previously  neglected 
through  ignorance. 

In  these  days  of  competition,  the  bank  can  no 
longer  sponsor  business  conducted  by  hit-or-miss 
methods.  The  credit  officers  of  progressive  banks 
insist  that  a  customer  who  apphes  for  credit  must 
know  what  it  costs  to  buy  or  to  manufacture  his  goods 
and  what  it  costs  to  sell  them.  It  is  no  longer  suflBcient 
to  know,  for  example,  what  the  total  rental  charge 
is ;  it  is  necessary  to  know  what  proportion  is  chargeable 
to  the  various  departments  of  the  business. 


AUDITS  THAT  HELP 


145 


Obviously,  a  well-managed  business  should  make  a 
profit  on  every  dollar's  worth  of  goods  sold,  and 
bankers  are  recommending  periodical  complete  audits 
to  make  this  possible.  By  dividing  business  activities 
into  four  principal  groups:  Manufacturing,  whole- 
sahng,  jobbing,  and  retaiUng,  and  then  checking 
carefully  the  developments  in  each  of  these  fields  as 
outlined  in  Chapter  IV,  it  is  not  difficult  to  know 
when  a  business  is  producing  a  legitimate  profit  and 
when  it  is  incurring  a  loss. 

Not  long  ago  a  concern  manufacturing  a  specialty 
device  for  physicians  applied  at  the  bank  for  an  exten- 
sion of  its  line  of  credit.  The  banker  had  been  watching 
the  progress  of  this  business  and  noted  that  its  receiv- 
ables were  steadily  accumulating.  He  called  on  the 
manufactm'er  to  find  out  why.  The  borrower  could 
give  no  explanation,  except  that  the  creditors  did  not 
pay  promptly;  and  since  they  were  doctors,  he  felt  it 
was  not  advisable  to  press  them  too  aggressively.  All 
of  these  past-due  accounts  were  carried  on  the  state- 
ment as  live  assets.  The  banker  insisted  they  should 
be  reduced  or  else  collected. 

"Fine,"  retorted  the  customer,  somewhat  nettled. 
"It's  all  right  to  give  advice,  but  just  show  me  how 
I'm  going  to  do  it." 

"I'll  tell  you,"  replied  the  banker,  coolly,  as  he 
leaned  forward  in  his  swivel  chair,  "and  I'm  sm*e 
you'll  recognize  the  practical  help  we're  trying  to  give 
you.  Let  a  first-class  audit  concern  go  over  your 
books,  analyze  your  outstanding  accounts  receivable, 
and  take  the  necessary  tactful  steps  to  reduce  them." 

The  visitor,  actually  happy  over  the  prospect  of 
being  reUeved  personally  from  settling  the  difficult 
problem,  consented  to  the  plan  and  willingly  agreed 
to  stand  the  expense.  He  thanked  the  banker  for 
outlining  the  way  out  and  forthwith  ordered  a  complete 
audit  of  the  books. 


i 


ta« 


146 


PREVENTING  CREDIT  LOSSES 


"We  found  from  the  auditors'  report/'  said  this 
banker  ''that  there  had  been  no  pretense  at  keeping 
accurate  costs.  This  was  a  serious  drawback  because 
the  manufactured  article  was  by  no  means  staple,  and 
subject,  indeed,  to  the  whims  of  a  particular  class. 
We  told  the  manufacturer  that  unless  he  adopted  a 
definite  cost  system  and  regulated  his  business  in  a 
more  systematic  manner  we  would  be  compelled  to 
call  his  loans.  He  pleaded  for  tune  and  assured  us 
that  he  would  gladly  follow  out  the  recommendations 
made  by  the  auditors." 

HERE'S  AN  ALMOST  UNLIMITED  FIELD  FOR  WORTH-WHILE 
SERVICE  TO  YOUR  CUSTOMERS 

As  a  result  of  this  audit,  about  $12,000  in  old 
accoxmts  which  had  been  on  the  books  for  a  long  time 
were  cleaned  up  within  90  days,  simply  because  the 
auditors  insisted  on  having  the  collections  made.  To 
Uquidate  the  balance  the  concern  promised  to  set  up 
a  special  reserve  from  time  to  time.  Thus,  every 
30  days  a  certain  amount  was  credited  to  the  reserve 
for  the  purpose  of  reducing  the  amount  held  in  slow 
accounts.  Gradually  this  burden  was  Hfted  and  the 
concern  eventually  got  into  the  favored  borrower  class. 

In  another  city,  a  manufacturing  concern  bought 
out  the  interests  of  a  partnership  in  a  similar  line  of 
business,  and  made  apphcation  to  its  bank  for  an 
increased  Hne  of  credit.  The  enlarged  company 
showed  a  net  worth  of  $106,000,  but  in  checkmg  over 
the  statement  the  bank  found  that  many  of  the 
items  appeared  to  have  exaggerated  values.  The 
borrower  was  asked  to  submit  a  statement  prepared  by 
an  outside  auditing  firm,  and  although  the  officers 
demurred  at  first,  they  finally  consented  to  have  the 
work  done  because  upon  this  detailed  report  depended 
the  chance  of  getting  more  money.  After  the  auditors 
finished  their  work  they  found  that  the  net  worth  was 


!    \ 


AUDITS  THAT  HELP 


147 


$82,000  instead  of  $106,000.  The  audit  disclosed  the 
fact  that  the  company  had  been  lax  in  its  bookkeeping 
methods  for  several  years  and  that  the  taking  over  of 
the  partnership  had  created  further  confusion.  The 
manager  of  the  concern  was  induced  to  install  a  com- 
plete new  system  as  a  result  of  the  audit  and  after 
this  was  accompUshed  the  bank  was  willing  to  give  the 
credit  originally  asked  for. 

'*In  fact,  we  were  more  willing  to  grant  the  line 
after  we  had  received  the  audit,  even  in  the  face  of 
the  decrease  in  the  net  worth,"  said  this  banker, 
**  because  we  knew  accurately  the  condition  of  the 
customer's  business.  In  all  of  the  statements  that  the 
concern  had  submitted  prior  to  this  time  we  felt  that 
there  was  more  or  less  guesswork  but,  because  its 
margin  of  profit  was  ample,  we  never  insisted  upon  a 
complete  audit.  After  the  books  were  overhauled,  the 
manager  felt  that  the  action  was  decidedly  worth 
while  to  stop  leaks  and  cut  hidden  expenses  which  had 
been  constantly  climbing.  The  audit  cost  in  the 
neighborhood  of  $600,  but  this  man  told  me  that  the 
advantages  which  resulted  repaid  him  within  a  month." 

The  audit  plan  is  of  special  value,  too,  in  handling 
the  item  of  depreciation.  Haphazard  methods  of 
disposing  of  depreciation  figures  are  now  giving  place 
to  more  uniform  ways  of  treating  them,  simply  through 
the  development  of  the  periodical  audit.  One  concern 
for  instance,  may  carry  in  its  statement  the  deprecia- 
tion charges  for  the  current  year  only.  Another  may 
show  no  depreciation  whatever.  It  seems  difficult, 
therefore,  for  the  banker  to  figure  out  what  policy  has 
been  followed  with  reference  to  depreciation  in  many 
cases,  without  the  clear  analysis  of  a  thorough  audit. 
Of  course,  values  are  at  best  approximate,  but  the 
record  of  failures  shows  that  many  concerns  in  the 
past  have  overvalued  their  plant  and  machinery 
accounts  in  order  to  swell  the  assets. 


ii 


1' 


f 


|i 


*l 


h 


148  PREVENTING  CREDIT  LOSSES 

The  statement  of  a  business  prepared  by  an  auditor 
aims  to  show  the  cost  value  of  an  asset  and  the  amount 
of  depreciation  which  has  been  estabhshed  against  that 
cost.  Ordinarily,  repairs  and  maintenance  should  not 
be  included  in  the  cost,  but  should  be  charged  against 
current  earnings.  The  exception  would  be  the  pur- 
chase of  a  knock-down  value  of  a  plant,  on  which 
repairs  are  necessary  to  bring  it  up  to  proper  working 
condition.  In  this  event  the  repairs  are  properly  a 
part  of  the  original  cost  and  should  be  included  as  such. 
It  is  desirable  also  to  know  the  percentage  of  depre- 
ciation annually.  An  audit  aims  to  establish  clearly 
the  relation  of  the  depreciation  account,  annually  and 
over  a  period  of  years,  to  the  fixed  assets. 

A  CAREFUL  AUDIT  MAY  SHOW  SOME  INTERESTING  FACTS 
ABOUT  THE  QUICK  ASSETS 

Audits  have  almost  always  demonstrated  that  the 
weakness  in  a  statement  lies  in  the  fact  that  the 
borrower  is  inclined  to  magnify  his  assets  and  depre- 
ciate his  liabilities.  As  already  indicated,  no  two 
statements  are  alike,  and  it  would  be  difficult  if  not 
actually  unwise,  to  apply  any  arbitrary  rule  in  passing 
on  an  application.  Still,  it  is  the  credit  man's  task  to 
see  that  the  borrower's  opthnism  about  his  assets  does 
not  lend  unwarranted  color  to  the  statement  for  the 
purpose  of  obtaining  credit.  The  audit  helps  materi- 
ally  to  attain  this  end. 

Liabilities  cannot  be  liquidated  from  fixed  invest- 
ments, and  the  burden  of  sustaining  and  carrying  on 
the  business,  therefore,  falls  upon  the  quick  assets.  A 
careful  audit  will  detect  any  tendency  to  load  the 
quick  assets  with  items  scheduled  under  the  fixed 
assets.  It  is  always  more  important,  as  already 
indicated,  to  know  that  the  concern  is  making  money 
rather  than  to  learn  whether  it  possesses  certain 
property  rights.    Out  of  the  profits,  the  loans  must 


.     i 


AUDITS  THAT  HELP 


149 


be  paid.  Audits  have  shown  in  many  instances  that 
the  statement  is  unconsciously  false,  due  mainly  to 
poor  bookkeeping  methods  which  actually  deceive  the 
borrower.  The  value  of  an  independent  audit,  there- 
fore, asserts  itself  mainly  in  checking  the  customer 
who  overestimates  or  who  is  too  confident  of  success. 

When  a  statement  is  made  it  should  be  correct. 
In  order  to  present  the  conditions  honestly  and 
properly,  an  annual  inventory  should  be  taken  and  an 
accurate  set  of  books  maintained.  When  the  bank 
compels  the  customer  to  observe  definite  care  in  the 
preparation  of  the  statement,  it  helps  him  also  to 
become  a  better  business  man.  He  usually  improves 
his  buying  methods  because  the  audit  compels  him  to 
become  familiar  with  his  stock.  He  grows  more 
careful  in  extending  credit  and  he  is  not  so  much 
inclined  to  take  on  new  obligations  because  he  learns 
the  actual  value  and  limitations  of  his  business. 

Another  significant  advantage  that  follows  the  audit 
is  the  prompt  detection  of  any  tendency  to  manipulate 
the  merchandise  accounts,  as  indicated  in  the  state- 
ment. This  item  should  be  examined  carefully  since  it 
sometimes  opens  the  way  to  misleading  statements 
which  endanger  the  risk.  Merchandise  is  worth,  not 
what  it  originally  cost,  but  what  it  will  bring.  When 
stock  on  hand  is  appraised  at  its  selling  price,  the 
temptation  is  to  anticipate  profits  and  this  represents 
a  f  onn  of  gambling  which  the  banker  strongly  opposes. 
Auditors  often  have  run  across  a  padded  merchandise 
account  and  have  promptly  cut  it  down  to  cost,  which 
is  the  nearest  correct  basis  of  figuring.  Again  auditors 
can  determine  whether  merchandise  is  seasonable  and 
salable  and  how  long  it  should  take,  at  the  ratio  of 
turnover  prevaiUng  in  that  particular  line,  to  turn 
this  merchandise  into  money. 

Other  pertinent  questions  relating  to  the  merchan- 
dise which  auditors  go  into  thoroughly  providing  the 


|| 


'H 


'll 


i 


150 


PREVENTING  CREDIT  LOSSES 


borrower  has  not  covered  them,  are:  Is  it  finished  or 
unfinished?  How  and  when  was  the  price  deter- 
mined and  who  marked  it?  Are  there  Hens  of  any 
character  against  the  goods?  Is  the  merchandise 
fresh?    Is  any  of  it  under  consignment? 

All  of  this  information  and  much  more  along  the 
same  line  are  revealed  by  a  complete  audit.  This 
data  then  becomes  a  valuable  guide  to  the  bank  in 
determining  how  far  it  can  go  in  making  loans.  Except 
at  the  end  of  the  fiscal  year,  an  auditor's  time  usually 
does  not  permit  him  to  verify  the  inventory  by  actual 
appraisal,  nor  is  he  able  to  verify  the  accounts  and 
bills  receivable  by  correspondence  with  the  debtors. 
On  the  whole,  however,  he  performs  a  valuable  service 
in  finding  out  how  the  business  is  moving  and  then 
offering  recommendations  which  abnost  always  lead 
to  improvements  which  strengthen  the  risk. 

While  it  is  probably  true  in  granting  credit,  whether 
in  the  form  of  loans  or  of  merchandise,  that  the  personal 
equation  and  a  knowledge  of  the  past  record  of  the 
customer  are  primary  considerations,  the  financial 
statement  is,  after  all,  the  practical  basis  for  deter- 
mining credit.  One  of  the  first  points  to  determine, 
therefore,  is  whether  the  statement  has  been  audited. 
An  audited  statement,  as  suggested  in  previous  para- 
graphs, is  valuable,  since  it  is  the  report  of  a  disinter- 
ested investigator  on  the  condition  of  a  business,  as 
against  one  made  up  by  the  concern  itself. 

The  initial  step  in  analyzing  an  audited  statement  is 
to  group  the  figures  in  order  to  bring  out  strongly  the 
leading  facts.  For  instance,  the  information  from  the 
statement  (Figure  41)  is  transferred  to  a  '*  comparison 
of  statements"  (Figure  42)  and  grouped  to  accomplish 
this  result.  The  assets  are  separated  into  the  two 
definite  classifications:  (1)  those  of  a  current  paying 
character,  and  (2)  those  of  a  permanent  character. 

Credit  men,  as  abeady  indicated  in  Chapter  VI, 
usually  require  a  2  for  1  condition,  or,  in  other  words, 


AUDITS  THAT  HELP 


151 


$2  of  quick  assets  to  cover  $1  of  debt.  Where  a  state- 
ment varies  from  this  condition,  the  cause  should  be 
accurately  determined.  The  2  to  1  ratio  of  ''quicks'' 
is  not  an  absolute  standard,  simply  a  working  rule. 
A  common  method  of  indicating  the  percentage  is  to 
divide  the  quick  assets  by  the  current  liabilities.  Let 
us  now  take  the  statement,  item  for  item. 

After  the  information  from  the  statement  has  been 
transferred  to  the  ''comparison  of  statements"  (Figure 
42),  and  it  is  found  that  the  ratio  of  current  assets  to 
current  liabilities  is  such  as  to  warrant  the  extension 
of  credit,  then  the  credit  officer  begins  to  analyze  and 
compare  the  different  items  of  the  report.  First  he 
considers  the  assets.  He  analyzes  those  items  of  a 
liquid  character  rather  minutely  because  they  are  of 
primary  importance  in  considering  banking  and  com- 
mercial credit.  Fixed  assets  interest  him  as  much  on 
account  of  the  carrying  charges  which  they  may 
involve  as  on  account  of  their  ultimate,  realizable 
value.  Bonds,  for  example,  involve  a  current  liability 
for  interest  charges. 

In  this  particular  statement  the  items  indicate  a  good 
cash  position,  which  is  generally  a  mark  of  a  healthy 
condition.  In  some  instances,  a  nominal  cash  item  is 
shown,  due  probably  to  the  borrower's  practice  of 
using  a  large  portion  of  available  cash  to  retire  out- 
standing obligations  just  prior  to  the  statement  date. 

It  is  also  desirable  to  know  whether  time  certificates 
of  deposit  are  included  in  the  cash  item,  for,  while 
these  certificates  represent  actual  cash  on  deposit, 
they  may  be  used  as  collateral  against  loans,  which 
might  not  show  on  the  fact  of  the  statement. 

The  most  vital  point  to  be  considered  in  the  analysis 
of  notes  receivable  is  whether  the  figure  shown  repre- 
sents notes  from  customers  only,  obtained  in  the  regular 
course  of  business.  If  included  in  this  amount  are 
notes    due    from    subsidiary    or   affiliated    interests, 


I 


^ 

M 


f 

I'; 


A«l«ts 


Not«a  Payable 

Accounta  Payabla 

Accrued  Interaat 

Bonded  Debt  (5,000 

Expensea  Annually  ). 
Reserve  for  Bonus 

and  ao  forth 

.Capital 


WILEY  PRC7IS10!!  CO. 
RAVEKSWOOO.  ILL 

StttMant  as  of  Daceaber  SI.  191T 

Liabllitla* 


_t  300. 000. 00 

_   34.779.16 

781 . 10 


50,000.00 
12.581.22 


Caah. 

Notes  Receivable 

Accounts  Receivable. 

Ilerchandire 


Preferred  (6%  Cuaulatlve)  350.000.00 
Coaaon 200.000.00 


Real  Estate  Buildings 
and  ao  forth . 

Inveataentin  A.  B.C.  Can  Co. 

Loans  to  Officers. 
Eaployees  and  ao  forth 

Deferred  Assets 


Surplus. 


318,232.17 


Machinery  and  Fixtures. 
Patenta  and  Good  Will  _ 


-t  44, 

-  52, 

-  253. 

.  406, 

.  164. 
90, 

6. 
3, 
46. 
200, 


112.58 
212  II 

162 . 68 
075  04 

073.71 
000.00 

826  32 
902.15 
009.02 
000.00 


$1,266,373.65 


»1. 266. 573. 65 


Salea  (1917). 

Profita 

Dividenda  

Depreciation 


.6%  Preferred. 


.12.344  146.89 

173,991.67 

B%  Coaaon 

tl2.88l.27 


Figure  41 :  Here  is  an  example  of  a  c»ncise  business  statement  for  use 
in  comparing  the  figures  shown  in  Figure  42.  From  statements  like 
this  the  bfmker  is  able  to  analyze  and  estimate  the  worth  of  a  borrower. 


REAL  ESTATE 


DESCRIPTION 

Sute  Nature  of  Buildings 

and  to  forth 


LOCATION 

Number 
and  Street 


TITLE 

is  in 
Name  of 


ASSESSED 
for 


MORTGAGES 


MORTGAGED 
to 


When 
Due 


Rate 


NAME. 

ADDRESS. 


INDIVIDUAL  STATEMENT 
Short  form 


NATURE  OF  BUSINESS 

MILWAUKEE    w7«U^ON^?S°f /."ll".^^*  "^'  with  the  MARSHALL  AND  ILSLEY  BANK. 
baMiti«iriSfi^  $  ""  cowervatively  worth  in  my  own  name    above  aU 

Ddlars 


and  that  the  following  is  a  true  statement  of  my  assets  and  liabilities. 

(Note:  For  real  eaute  give  only  equity  below  and  fiU  out  form  for  description  on  back) 

ASSETS 

=  I    _     I         : 


^ 


T. 


LIABILITIES 


Dated  Milwaukee.  Wis.. 


.191. 


Figure  43:  This  individual  statement  form  helps  one  bank  to  measure 
a  borrower's  worth  in  real  estate  and  furnishes  a  valuable  record.  The 
reverse  (upper  form)  is  for  a  detailed  description  of  the  property  listed. 

152 


TZVAVCZAL      STATSMZVSS 
Coi^arison  of  Stateaents. 
Vlley  Provision  Co.,  Ravenswood.  Zllinois. 
Boainess— Wholesale  Provision. 

"  RECD.  DIRECT.  "" 

ASSETS.  Dec.   31.    1917. 

Caah t  44,112.58 

Bills  Receivable,  Cuatoaers     52.212.11 
Accounta  Receivable.  Cuatoaers.  253.162.68 

Merchandiae,  finished < 

Merchandise,  unfinished )  406.075.04 

,Ra«  aaterial ( 

TOTAL  QUICK  ASSETS $755.562.41 

Real  Estate ( 

Buildings )|164. 073.75 

Machinery  and  Fixtures 46,009.02 

Patenta  and  Good  Kill 200,000.00 

Inveataonta 90. 000 .  00 

Loana  to  Officers  and  ao 

forth 6.826.32 

Deferred  Assets 3.902.15 

TOTAL tl. 266. 373. 65 

LIABILITIES. 

Bills  Payable.* Merchandiae 

Bllla  Payable  to  own  Banks t300.000.00' 

Billa  Payable,  otherwiae 

Accounts  Payable 34.779. 16 

Accrued  Intereat 781 .  10 

Bonded  Debt  retireaeat 5.000.00 

Kaserva  for  Bonus  and  ao  forth  12 , 581 . 22 

Total  Current  Liabilities. .$353,141.48 

Bonded  Debt  (when  due)  1923 t  45.000.00 

Mortgage  Loans  (when  due) 

Total  Liabilities 398,141.48 

Capital  (  Auth.  Pref.  6S  Cua...  350,000.00 

(  Auth.  Coa 200,000.00 

Surplua  and  Undivided  Profits..  318.232.17 

Total u 11,266.373.65 

Total  Quick  Assets 755.562.41 

Current  Liabilities 353.141.48 

EXCESS— QUICK $402,420.93 

Salea $2,344,146.89 

Contingent  Liabilities 

Insurance 

Dividenda  GV 2l,00O.0O 

C 16.000.00 

Depreciation 12,881.27 

Net  Profits 73,991-67 

Outside  Meaaa 


Figure  42 :  Sheets  like  these,  used  for  comparison  of  borrowers*  state- 
ments, are  of  great  value  to  the  credit  manager  in  determining  risks, 
and  guarding  against  loss.  Note  how  the  figures  are  entered  here  from 
Figure  41,  with  blank  spaces  for  the  statement  of  the  following  year. 

153 


N 


V 


154 


PREVENTING  CREDIT  LOSSES 


f! 


officers,  or  employees,  the  amount  of  such  notes 
should  be  withdrawn  and  placed  m  the  slow  assets, 
somewhat  as  outlined  in  Chapter  VI.  A  large  notes 
receivable  item  might  also  reflect  unfavorable  business 
conditions  in  the  borrower's  immediate  locality.  At 
any  rate,  even  though  the  statement  is  carefully 
audited  and  all  doubtful  accounts  are  eliminated,  a 
certain  allowance  must  be  made  for  depreciation  on 
this  item,  even  if  not  in  actual  figures. 

At  times  the  item  "notes  receivable  secured  by  real 
estate"  (Figure  43),  or  some  other  collaterals  is  noted 
on  the  statement.  This  always  leaves  the  impression 
that  the  prompt  collection  of  the  item  is  questioned. 
If  the  amount  is  large,  an  explanation  from  the 
customer  should  be  requested. 

In  instances  where  companies  sell  their  merchandise 
on  an  acceptance  basis  (Chapter  XVIII),  the  accept- 
ances would,  of  coiu^e,  be  available  for  discount  with 
their  bankers,  or  for  disposal  in  the  open  market. 
This  would  obviate  the  necessity  of  borrowing  on  their 
own  note  to  the  full  extent  of  their  operations.  The 
discount  or  sale  of  such  acceptances  unless  ''without 
recourse"  would  constitute  a  contingent  liabiUty. 

ADDITIONAL  FACTS  ABOUT  ACCOUNTS  RECEIVABLE  THAT 
IT  MAY  PAY  TO  WATCH  CAREFULLY 

Another  point  to  be  scrutinized  in  connection  with 
accounts  receivable  is  whether  they  have  been  pledged 
in  any  way.  Some  financing  concerns  help  business 
houses,  which  may  have  gotten  into  a  weak  financial 
position,  by  making  advances  to  them,  secured  by  the 
regular  open  book  accounts.  The  rate  for  this  accom- 
modation is  always  higher  than  the  average  discount 
rate.  As  the  accounts  are  settled,  the  proceeds  are 
appHed  to  the  money  advanced,  but  in  hypothecating 
its  accounts,  the  company  remains  contingently  liable 
for  their  ultimate  payment. 


AUDITS  THAT  HELP 


155 


In  connection  with  the  accounts  receivable,  the 
audit  should  show  whether  all  doubtful  accounts  have 
been  charged  off  and  whether,  as  in  the  case  of  the 
notes  receivable,  these  accounts  are  due  from  customers 
for  merchandise  sold  in  the  usual  course  of  business. 

Indebtedness  due  from  subsidiaries  or  affiliated 
companies  should  not  be  included  in  the  quick  assets, 
because  while  the  receivables  so  due  may  be  hquidated 
from  time  to  time,  they  are  more  or  less  of  a  permanent 
character  and  frequently  represent  the  actual  working 
capital  or  the  investment  in  the  subsidiary.  There- 
fore, in  the  event  of  Hquidation,  these  funds  are  not 
usually  found  to  be  of  full  realizable  value. 

The  success  of  any  business  hinges  largely  on  two 
points:  the  abiUty  (1)  to  turn  the  stock  rapidly  at  a 
profit,  and  (2)  to  collect  the  accounts  promptly. 

In  the  event  that  an  abnormal  amount  of  stock  in 
proportion  to  the  business  is  shown,  the  audit  should 
indicate  the  reason,  and  if  possible  the  bank  should 
make  inquiry  regarding  the  prevailing  conditions  in 
the  borrower's  particular  line  of  business.  In  some 
instances  an  unusually  large  inventory  is  necessary, 
due  to  the  company's  distance  from  its  sources  of 
supply.  Seasonal  conditions  may  at  times  affect 
inventories.  In  other  words,  the  bank  must  deter- 
mine whether  the  existing  conditions,  in  conjunction 
with  the  facts  revealed  in  the  audited  statement, 
warrant  a  borrower  in  carrying  an  unusual  supply  of 
merchandise  at  that  time. 

Taking  up  the  item  of  real  estate  and  buildings,  the 
first  point  to  be  settled  is  that  of  ownership.  Does  the 
property  belong  to  the  company  in  fee  simple,  or  does 
the  title  rest  with  a  realty  holding  company,  indi- 
viduals, or  others?  Of  what  construction  are  the 
buildings?  Is  a  sprinkler  system  installed?  Is  every- 
thing properly  insured?  Last,  and  most  important, 
has  a  proper  depreciation  charge  been  made  each  year? 


!< 


1 


V] 


y 


m 


II 


156 


PREVENTING  CREDIT  LOSSES 


In  prosperous  times  the  temptation  sometimes  is 
strong  with  some  concerns  to  spread  out  and  make 
substantial  additions  to  plants.  It  is  here  that  the 
banker  should  sound  a  note  of  warning.  For,  while 
it  may  be  true  that  conditions  might  warrant  plant 
enlargements,  serious  thought  must  be  given  to  whether 
the  business  is  Ukely  to  continue  increasing  or  whether 
the  increased  demand  is  due  only  to  temporary  con- 
ditions. The  telltale  figures  of  the  periodical  audit 
tend  automatically  to  lessen  this  temptation  and 
thus  help  the  banker  to  cooperate  with  customers 
more  closely  than  he  could  otherwise. 

The  investment  item  in  the  statement  should  be 
carefully  gone  over  as  set  forth  in  the  audit.  Where  a 
large  amount  appears,  a  schedule  of  the  investments 
is  valuable.  If  composed  of  government  or  municipal 
issues,  or  listed  stock  exchange  securities,  taken  at 
proper  valuations,  the  item  can  be  considered  as  a 
current  asset  because  of  its  Uquid  character.  It  should 
also  be  determined  whether  any  are  pledged  as  collateral 
on  loans  or  otherwise.  If  the  item  represents  the 
borrower's  investment  in  affihated  concerns,  it  should 
be  classified  with  the  slow  assets  and  careful  consider- 
ation should  be  given  to  the  company's  commitments 
in  that  direction. 

Where  a  manufacturing  or  distributing  company 
controls  several  affiUations,  through  stock  ownership, 
and  is  interested  in  their  financial  arrangements,  a 
consoHdated  balance  sheet  is  most  essential  to  estabUsh 
the  status  of  the  risk.  Here  the  audited  statement 
is  valuable  to  the  bank  in  safeguarding  its  loans. 

Under  the  head  of  deferred  assets  are  included  items 
like  advances  to  salesmen  for  traveling  expenses  and 
so  on,  prepaid  interest,  taxes,  insurance  premiimis,  and 
other  items  covering  a  succeeding  period  of  operation. 
These  should  not  be  included  in  the  current  assets. 
They  are  only  nominal  assets  and  usually  have  no 


AUDITS  THAT  HELP 


157 


realizable  value.  The  auditor's  report  should  show 
also  whether  there  are  any  consignment  accounts  to  be 
taken  into  consideration,  either  in  the  accounts 
receivable  or  in  the  inventory  item,  for  it  can  be 
readily  appreciated  that  merchandise  out  on  consign- 
ment is  not  properly  an  accoimt  receivable  until  the 
merchandise  is  actually  sold.  Further,  because  the 
merchandise  so  consigned  is  not  under  the  direct 
control  of  the  company  at  all  times,  it  is  subject  to 
incidental  hazards  and,  therefore,  should  be  carried 
under  a  separate  classification.  An  audit  would 
usually  reveal  a  contingency  of  this  sort  where  the 
banker  might  not  discover  it  on  the  statement  itself. 
Incidentally,  many  bankers  have  found  it  helpful 
in  analyzing  all  items  of  the  statement  to  ask  them- 
selves, regarding  the  liquid  character  of  each  one: 
''Could  this  be  turned  into  cash  readily  in  the  event  of 
liquidation?"    The  test  then  is  thorough. 

THE  NOTES  PAYABLE  ITEM  ON  THE  STATEMENT  WILL  BEAR 
THIS  SPECIAL  ATTENTION,  YOU'LL  AGREE 

Another  item  to  give  special  attention  to  is  that  of 
notes  payable.  It  should  be  determined  whether  any 
or  all  of  them  are  secured,  either  by  indorsement  or 
collateral,  or  in  any  other  way.  There  is  no  fixed  rule 
regarding  the  proportion  of  debt  the  average  concern 
should  show  as  compared  with  its  capital  investment, 
and  while  one  naturally  likes  to  see  the  notes  payable 
not  greatly  in  excess  of  the  capital,  there  are  so  many 
circumstances  affecting  this  that  it  cannot  be  reduced 
to  any  fixed  ratio.  The  results  of  the  audit  indicate 
the  healthy  or  unhealthy  condition  of  the  concern. 

If  the  statement  shows  deposits  of  money  by  stock- 
holders or  interested  persons,  it  is  well  to  determine 
how  the  amount  was  arrived  at,  whether  through 
dividends  not  withdrawn  or  through  money  loaned  for 
the  needs  of  the  business.    If  the  amount  is  large,  it 


I  "1 

i 


158 


PREVENTING  CREDIT  LOSSES 


AUDITS  THAT  HELP 


159 


m 


may  indicate  that  the  money  should  actually  be  in 
the  business  through  the  issue  of  capital  stock,  for 
even  though  it  is  in  friendly  hands,  in  the  event  of 
trouble  this  money  is  usually  the  first  to  be  drawn  out. 
Another  essential  point  in  connection  with  the  notes 
payable  is  to  determine  the  peak  of  the  company's 
borrowings  and  at  what  period  this  figure  is  reached. 
An  audit  would  give  the  information  desired.  The 
amount  of  notes  payable  may  also  bear  some  relation 
to  commodity  prices,  high  prices  requiring  more 
capital,  and  vice  versa. 

Accounts  payable  represent  money  owed  for  the 
purchase  of  suppUes  and,  comparatively  speaking, 
they  should  never  be  large.  The  average  company 
borrows  money  from  its  bank  to  take  advantage  of 
the  cash  discounts  offered  for  the  payment  of  bills 
within  a  specified  period.  A  large  accounts  payable 
item  is,  therefore,  a  warning  that  the  company  is  not 
availing  itself  of  the  discounts.  Companies  sometimes 
secure  their  accounts  payable  and  consideration  should 
be  given  to  this  possible  arrangement. 

The  item  of  reserves  is  always  worthy  of  close 
attention.  Reserves  set  aside  for  a  specific  purpose, 
such  as  depreciation  on  real  estate,  plant,  machinery, 
and  so  on,  may  be  deducted  directly  from  the  asset 
which  they  affect.  However,  this  is  a  matter  of 
opinion,  as  some  bankers  prefer  to  show  these  reserves 
under  the  head  of  deferred  Uabilities  in  order  to  make 
apparent  the  increase  which  should  appear  in  such 
reserves  from  year  to  year. 

Reserves  for  replacements,  repairs,  or  improvements, 
of  course,  should  be  classified  under  the  slow  liabihties, 
and  the  audit  will  determine  whether  this  had  been 
done.  Reserves  for  discount,  allowances,  doubtful 
accounts,  and  so  on,  should,  however,  in  all  cases,  be 
deducted  from  the  receivable  items  in  the  assets. 
Reserves    for    taxes,    interest,    bonuses,    payrolls, 


dividends,  and  so  on,  are  not  properly  reserves  at  all, 
but  are  accrued  Uabilities  and  as  such  should  be 
included  in  the  current  debt. 

The  item  of  bonded  debt  should  be  given  very  care- 
ful thought.  The  audit  should  determine  when  the 
issue  was  first  brought  out,  its  original  amount,  how 
it  is  secured,  and  so  on.  In  most  instances,  bond  issues 
are  secured  by  mortgages  on  the  real  estate,  the  plant, 
and  so  on.  The  actual  security  back  of  the  issue  should 
be  learned,  as  there  are  many  bond  issues  secured  by 
mortgages  covering  both  real  and  personal  property, 
that  is,  real  estate,  plant,  merchandise,  accounts,  cash, 
and  the  hke,  in  effect  a  chattel  mortgage  on  the  entire 
assets  of  the  company.  With  security  of  this  character 
the  bondholders  have  a  first  lien  on  all  the  assets  of 
the  company  in  the  event  of  its  failure. 

The  next  step  is  to  learn  the  date  of  the  maturity 
of  the  issue,  the  rate  of  interest,  and  whether  there  is  a 
specified  annual  retirement  provision.  There  is  no  set 
rule  for  determining  to  what  extent  of  the  value  of 
the  security  a  bond  issue  may  be  made,  the  amount 
usually  being  determined  by  the  underwriters  of  the 
issue.  It  must  be  remembered,  however,  that  in  the 
event  of  liquidation  the  fixed  assets  of  any  concern 
undergo  rapid  shrinkage  in  value.  It  is  quite  natural 
for  the  human  mind  to  lose  interest  in  a  proposition 
once  your  own  claim  has  been  settled.  In  the  event  of  a 
forced  sale  of  the  property,  the  bondholders  often 
are  interested  only  to  the  extent  of  their  holdings. 

Careful  attention  must  also  be  given  to  the  final 
date  of  maturity  of  a  bond  issue,  and  if  this  date 
occurs  during  the  current  year,  the  bank  should  have 
a  clear  understanding  of  what  plans  the  company  has 
in  mind  for  refunding  the  issue,  whether  by  replacing 
the  bonds  through  a  like  issue,  by  issuing  short-time 
notes  of  debentures,  or  by  issuing  additional  capital 
stock.    Sometimes  there  is  a  conversion  clause,  per- 


y 


t 


160 


PREVENTING  CREDIT  LOSSES 


I 

'I  I 


mitting  the  conversion  of  the  bonds  into  stock  at 
definite  periods.  All  such  questions  should  be  analyzed 
with  a  view  to  the  debt-paying  ability  of  the  borrower. 

The  capital  stock  item  also  needs  careful  attention. 
What  is  the  authorized  issue?  What  is  the  par  value? 
Is  there  any  unissued  stock  in  the  treasury?  Is  the 
treasury  stock  ever  used  as  collateral?  Has  the  treasury 
stock  or  the  treasury  bonds  appearing  in  the  assets 
been  deducted  from  the  capital  liability?  If  preferred 
stock  has  been  issued,  what  is  the  rate  of  interest  on 
it?  If  the  dividends  are  cumulative,  are  any  in  arrears? 
What  are  the  requirements  for  retiring  preferred  stock 
issues,  if  any?  All  these  questions  have  to  be  satis- 
factorily answered. 

It  is  becoming  more  prevalent  among  progressive 
business  houses  to  insure  the  lives  of  the  principal 
executives.  This  obviously  is  sound  judgment,  as  the 
producing  genius  or  geniuses  of  a  growing  concern  are 
really  one  of  its  most  valuable  assets.  The  audit 
will  doubtless  set  forth  this  fact  so  that  no  doubt 
regarding  it  will  exist  in  the  mind  of  the  banker  to  be 
later  thrashed  out. 

Frequently  the  death  of  a  member  of  a  firm  causes 
embarrassment,  and  Hfe  insurance  might  go  a  long  way 
toward  paying  out  the  interest  of  the  deceased  and 
reheving  the  firm  of  a  possible  capital  stringency. 
Further,  a  life  poHcy  acquires  a  cash  surrender  value 
which,  in  the  event  of  any  diflBculty  or  liquidation, 
would  be  available  to  the  creditors.  In  the  statement 
of  a  going  concern,  where  '^cash  surrender  value" 
appears  as  an  asset,  the  item  should  be  included 
among  the  investments  and  not  as  a  quick  asset. 
Life  insurance  could  also  be  utilized  as  a  sinking  fund, 
taken  out  against  the  ultimate  payment  of  mortgage 
indebtedness. 

All  these  and  other  questions  are  often  brought  out 
much  more  clearly  in  an  audited  statement  and  report 


'•n 


ORGANIZATION  OF  AN  INDOSTRIAL  SERVICE  DEPARTMENT 


fOREICN 

TMDE 

BCPAITMEIIT 


BUSINESS 
BEPARTMENT 


INDUSTRIAL 

SERVICE 

BEPARTMENT 

fordOMrRelcNon 

wHh  Indintrial  Cin- 

tonwnbyVMto  ot 

Rbrm  Mambar  of  th* 

DBpMtnMnt  to  liioif 

PliKM  of  BiniiMU 


T 


Olvtolon  for 

Auditinfl 

Aceountini 


J 


CiMfinf  HouM  DWWoii 

fof  Rif Of  motion  on 

Coot  Syoteow 

Purchtsing  Method* 

Production  Mottieda. 

StiooMothodo 

Shop  Organization 

Oflico  Organlzatioii 

Employmant  Method* 

Traffic  Problems 

federal  and  State  Industrial  Oati 

Building  Design  and  Constnictioii 

Shop  and   Office  Planning 

Machine  Design  and  Constructioa 

Power  and  Lighting  Methods 

Insurance  Prot>lems 

Advertising  Prcbiema 

BdMHliOMi  and  Betterment  Woilc 

iHdustria)  Civics 

Tax  Prot>lems 

Industrial  Service  Publicity  PioMmm 

StatistieK. 


|l 


Figure  44:  How  far  some  banks  are  developing  their  service  to  cus- 
tomers is  shown  by  this  chart  illustrating  the  industrial  and  credit 
features  of  an  eastern  bank.  While  such  a  plan  would  be  too  broad  in 
scope  for  small  banks  it  may  suggest  a  way  for  extending  their  services. 

161 


!*1 


II 


162 


PREVENTING  CREDIT  LOSSES 


than  in  one  made  up  by  officers  of  a  company.  Thus 
the  audit  clarifies  the  work  of  the  bank  credit  officer 
and  safeguards  commercial  loans.  Some  banks  have 
gone  even  further  to  make  credits  easier  to  handle. 

An  eastern  national  bank,  for  example,  has  estab- 
lished an  industrial  service  department  to  develop 
additional  facts  and  angles  on  the  condition  of  pro- 
spective customers  and  also  to  insure  the  bank  against 
taking  on,  unsuspectedly,  industrials  which  are  poten- 
tially, if  not  actually,  poor  risks.  This  is  supplemen- 
tary to  the  help  it  gets  from  having  audits  made. 

It  is  the  purpose  of  this  bureau,  therefore,  to  aid 
business  men  in  coordinating  their  efforts  and  in 
showing  them  the  value  of  a  thorough  audit.  By 
acting  also  as  a  clearing  house  for  the  latest  and  best 
information  on  industrial  management  and  kindred 
subjects  it  is  able  to  dispense  helpful  information  to 
those  who  will  be  most  benefited.  In  order  to  keep 
the  service  on  a  reciprocal  basis  the  field  embracing 
the  bank's  bureau  is  circularized  from  time  to  tune 
for  the  purpose  of  ascertaining  the  opinion  and  practice 
of  managers  generally  on  different  business  problems. 
This  circularizing  need  not  be  confined  entirely  to 
customers,  although  it  has  been  found  that  they 
usually  respond  with  greater  readiness.  The  results  of 
researches  already  made  by  the  bureau  have  been 
embodied  in  printed  form  for  distribution.  How  an 
organization  hke  this  is  developed  is  indicated  in  the 
chart  (Figure  44)  reproduced  on  page  161. 

Thus,  with  the  growth  in  popularity  of  the  outside 
audit,  other  auxiliary  helps  are  coming  into  play  to 
encourage  healthy  business  development.  All  these 
factors  not  only  advance  business  in  general,  but  go  a 
long  way  toward  simplifying  the  bank's  credit 
routine,  which  naturally  cuts  costs  and  minimizes 
losses.  Lending  money,  then,  instead  of  being  a  bug- 
bear, becomes  easy  and  profitable. 


CHAPTER  XII 
KEEPING  IN  TOUCH  WITH  MARKET  CONDITIONS 

EACH  month  the  credit  department  of  a  middle- 
western  bank  endeavors  to  find  out  the  business 
sentiment  in  its  community  by  sending  out  to 
customers  '* ballot'*  slips  like  this: 


Present 

n  Above  Normal 

Business 

R  Below  Normal 

Conditions 

□  Normal 

Future 

n  Improving 

Business 

n  Stationary 

Conditions 

|)i|  Declining 

One  month's  returns  on  this  inquiry  showed  the 
number  of  replies  to  be  divided  in  their  answers  by 
percentages  as  follows: 


Above  normal 

29.03%  of  the  replies 

Below  normal 

38.72%  of  the  replies 

Normal 

32.25%  of  the  replies 

Total  replies 

100.00% 

Improving 

61.40%  of  the  replies 

Stationary 

33.33%  of  the  replies 

Declining 

5.27%  of  the  replies 

Total  replies 

100.00% 

When  these  slips  were  first  sent  out,  a  letter  accom- 
panied them  requesting  the  recipient  to  indicate  his 
opinion  of  business  conditions.  This  letter  explained 
that  the  slips  would  be  issued  monthly  and  the  results 
classified  and  tabulated.  The  bank  promised  also 
that  any  of  the  business  men  who  cooperated  would 
have  the  benefit  of  the  bank's  opinion  on  general 

163 


i« 


164 


PREVENTING  CREDIT  LOSSES 


WATCHING  THE  MARKETS 


165 


i 


business  conditions  not  only  in  the  community  but 
throughout  the  country.  Naturally  the  men  were 
eager  to  give  their  assistance,  since  they  found  here 
an  opportunity  to  determine  definitely  just  how  busi- 
ness was  moving,  especially  in  their  inmiediate  sphere. 

*'  In  1907  the  banks  became  alanned  at  the  inmiinent 
depression  and  there  was  a  general  call  on  loans," 
says  this  banker.  "The  result  was  that  money 
tightened  up  and  the  panic  followed.  Now,  if  the  banks 
had  not  become  frightened,  it  is  doubtful  if  there 
would  have  been  such  havoc  in  the  market.  It  is 
interesting  to  compare  1907  with  the  conditions  in 
1912  and  1913.  In  those  later  years  the  business 
situation  was  fundamentally  worse  than  in  1907,  yet 
the  banks  were  not  alarmed  and,  therefore,  they  were 
able  to  tide  over  what  easily  might  have  been  a 
repetition  of  the  1907  affair.  This,  it  seems  to  me, 
goes  to  show  that  often  a  panic  is  more  directly  the 
result  of  a  psychological  condition  rather  than  the 
result  of  actual  facts.  Thus,  by  using  these  simple 
slips  which  cost  less  than  $100  a  year  including  postage, 
we  are  able  to  learn  what  the  business  men  are  thinking. 
By  finding  out  their  condition  of  mind,  it  follows  that 
we  can  satisfactorily  gage  the  safety  of  our  loans." 

The  slips  received  each  month  are  tabulated  on  a 
large  sheet  which  is  ruled  off  to  embrace  all  the  months 
of  the  year.  Thus  at  the  end  of  the  year  the  bank 
has  a  bird's-eye  view  of  the  rise  and  fall  in  business 
conditions  as  interpreted  by  their  customers.  It  is 
worth  noting  that  plurality  of  opinions  given  under 
this  simple  plan  has  shown  the  tendencies  of  business 
and  market  conditions  from  30  to  60  days  ahead  of 
the  large  agencies  which  conduct  national  surveys  in  a 
similar  manner. 

This  is  one  of  many  inexpensive  plans  that  the  enter- 
prising bank  credit  manager  employs  to  establish  a 
sound  promise  upon  which  to  make  loans.    A  careful 


reading  of  the  newspapers  and  the  trade  journals  offer 
another  effective  medium  for  keeping  a  line  on  trade. 
'*I  aim  to  spend  at  least  an  hour  each  afternoon 
going  over  the  newspapers  and  magazines,"  says  the 
credit  man  of  one  bank  which  has  built  up  a  file  of 
more  than  35,000  names.  **  Display  advertisements 
are  sometimes  just  as  valuable  as  important  news 
items.  Not  long  ago  a  new  mercantile  concern  started 
business  and  used  a  great  deal  of  advertising  space  in 
announcing  the  opening.  I  clipped  each  of  these 
advertisements  and  studied  them  because  they  ap- 
peared to  reveal  the  policy  which  the  house  was 
shaping.  Within  a  week  I  began  to  receive  inquiries 
about  this  concern.  I  sent  an  inquiry  to  the  com- 
mercial agencies,  but  the  data  which  they  supplied  was 
superficial.  Then  I  turned  to  my  files  and  with  the 
advertising  copy  as  a  starting  point,  I  prepared  my  own 
list  of  questions,  which  enabled  me  to  approach  the 
owners  of  the  business  in  a  definite  way.  Within  two 
hoiu-s  I  had  all  the  information  I  wanted." 

ARE  YOUR  CREDIT  FILES  UP  TO  THE  MINUTE?    PERHAPS 
THIS  EASILY  ADAPTABLE  METHOD  WILL  HELP  YOU 

This  credit  man  clips  all  items  relating  to  court 
judgments  and  other  litigations  which  have  a  bearing 
on  the  customer's  files.  In  the  same  way  he  examines 
daily  the  quotations  of  the  provision  market,  of  the 
hide  and  leather  market,  and  so  on,  and  notes  any 
sharp  changes  for  consideration  on  the  following  day. 

It  is  almost  impossible  for  any  one  bank  credit  man 
to  master  all  the  details  of  all  the  markets.  In  many 
banks  this  is  not  necessary.  But  in  some  of  the  large 
banks  specialized  knowledge  of  the  different  lines  is 
essential  and  the  lending  officers  therefore  have  charge 
of  separate  divisions  of  the  business.  This  important 
feature  of  bank  organization  is  treated  more  fully  in 
the  volume  of  this  series  on  executive  control. 


II' 


fv  . 


V  i 


ii   J 


166 


PREVENTING  CREDIT  LOSSES 


In  the  majority  of  banks,  either  the  president,  the 
vice-president,  or  the  cashier  may  be  its  lending  or 
credit  ofl&cer.  Possibly  two  or  all  of  them  may  have  the 
authority  to  pass  on  loans.  Before  the  credit  depart- 
ment was  developed  to  its  present  high  standard,  it 
was  usually  the  custom  for  the  lending  oflficer  to  look 
up  the  borrower's  rating  in  a  commercial  agency 
report,  make  such  other  investigation  as  he  considered 
necessary,  and  take  action  on  the  strength  of  his  judg- 
ment of  the  appHcation.  The  credit  department  now 
takes  over  the  details  of  the  investigation,  systematizes 
the  records,  provides  quick  reference  to  such  records 
as  described  in  Chapter  XIV,  and  gives  the  lending 
officer  the  assistance  of  the  credit  manager's  judgment. 

With  this  fund  of  information  in  the  hands  of 
the  manager  of  the  credit  department,  backed  by  his 
experience  along  this  particular  line,  his  reports  ob- 
viously are  of  the  utmost  value.  While  he  has  no 
authority  to  pass  upon  loans,  the  lending  officer  relies 
to  a  great  extent  upon  him. 

While  the  financial  standing  of  a  depositor  is  of  no 
interest  to  a  bank  until  the  depositor  becomes  a 
borrower,  yet  there  is  always  the  possibility  that  a 
depositor  may  desire  to  obtain  a  loan  and  it  is  impor- 
tant that  such  information  be  at  hand  so  as  to  permit 
prompt  action  when  the  request  is  made.  That  is  why 
every  important  fact  regarding  markets  and  business 
in  general  should  be  at  hand  when  needed. 

The  depositor  who  obtains  a  line  of  credit  and  who 
avails  himself  of  this  is  expected  to  supply  the  credit 
manager  with  frequent  financial  statements  (Chapter 
VI),  showing  the  condition  of  his  business  and  per- 
sonal affairs.  Their  figures  compared  with  the  fund  of 
market  information  serves  to  advise  the  bank  of  the 
trend  of  the  borrower's  business. 

The  statements  are  epitomized  on  a  blank  which  is 
specially  prepared  for  the  purpose  and  which  provides 


WATCHING  THE  MARKETS 


167 


for  a  ready  comparison  of  these  statements  from  year 
to  year.  The  record  cards  of  customers  also  help  the 
credit  manager  to  compare  the  conditions  of  bor- 
rowers in  contrast  to  the  general  market.  If  a  business 
shows  smaller  sales  when  the  general  community  is 
prospering,  the  banker  can  immediately  get  busy  and 
find  out  the  reason. 

As  time  passes  the  record  cards  (Figures  45  and  46) 
of  customers  become  more  and  more  valuable  as  a 
source  of  reference.  In  the  course  of  a  year  or  more 
Buch  records  become  a  very  accurate  guide  to  a 
depositor's  trustworthiness  and  to  his  ability  to 
adjust  himself  and  his  business  to  general  changing 
financial  conditions. 

The  magnitude  of  this  country's  financial  operations 
is  best  exemplified  by  the  increasing  amount  of  com- 
mercial paper  bought  and  sold  in  the  open  market. 
Vast  business  enterprises,  or  individuals  carrying  on 
large  financial  transactions,  require  immense  sums  of 
ready  money.  To  facilitate  securing  these  loans,  con- 
cerns issue  negotiable  30-,  60-  or  90-day  notes  and  sell 
this  commercial  paper  to  the  banks  through  brokerage 
firms  which  make  this  branch  of  finance  their  business. 
It  is  now  the  generally  accepted  pohcy  of  bankers  to 
buy  all  such  commercial  paper  from  the  brokers. 
Keeping  in  touch  with  the  commercial  paper  market 
is  of  considerable  help  to  bankers  in  watching  the 
general  trend  of  the  market.  The  activity  of  com- 
mercial paper  acts  somewhat  as  a  barometer  for  general 
financial  conditions. 

For  example,  a  large  manufacturing  or  pubHc  service 
corporation  might  desire  the  quick  use  of  $500,000 
cash.  No  bank  could  lend  such  an  amount  of  money 
to  an  individual,  firm,  or  corporation,  because  of  the 
limit  provided  by  law,  prohibiting  a  bank  from  lending 
to  one  borrower  an  amount  in  excess  of  10%  of  the 
bank's  total  capital  and  surplus.     If  the  borrower 


1 


I 


m 


I  1^ 


*! 


1  •     -  • 

1 


(I 


168 


PREVENTING  CREDIT  LOSSES 


attempted  to  negotiate  the  loan  directly  there  might 
be  considerable  delay  before  he  could  obtain  the  money 
from  several  banks.  He  therefore  issues  a  series  of 
negotiable  notes  and  places  the  entire  issue  in  the  hands 
of  a  brokerage  firm  to  sell.  This  activity  of  one  firm 
and  the  interest  rate  it  expects  to  pay  reflects  some- 
what the  state  of  the  market. 

Note  brokers  daily  notify  all  the  banks  on  their  list 
of  any  paper  which  they  have  to  sell,  and  have  no 
difficulty  in  disposing  of  the  desirable  paper  which 
they  wish  to  market,  a  large  loan  thus  being  distributed 
among  perhaps  20  different  banks. 

It  is  the  duty  of  the  credit  department  of  a  bank  to 
make  reports  regarding  the  safety  of  such  loans.  All 
paper  of  this  sort  is  purchased  from  the  brokers  on  a 
10-day  option  as  described  in  Chapter  VI  of  the  volume 
on  loans  and  discounts.  The  lending  officer  advises 
the  credit  manager  of  every  contemplated  pm-chase  of 
commercial  paper.  The  credit  manager,  in  tm-n, 
with  his  mass  of  market  and  other  information,  sizes 
up  the  paper  and  makes  his  report.  If  he  has  in- 
sufficient information  on  any  particular  piece  he 
appeals  to  the  broker  for  a  financial  statement  and 
for  references.  These  the  broker  promptly  supplies 
and  they  form  an  additional  basis  for  the  credit  man's 
report  to  the  lending  officer. 

All  the  available  information  obtainable  from  the 
source  is  entered  on  a  record  card  especially  prepared 
for  this  purpose  (Figure  47)  and  each  firm  or  individual 
whose  paper  is  taken  by  the  bank  is  accorded  a  folder 
in  the  file  devoted  to  this  class  of  loans.  These  records 
are  preserved  and  form,  in  connection  with  the  market 
report  records,  a  quick  reference  for  future  use  when 
loans  from  the  same  concerns  are  again  considered. 

The  bank  credit  manager  must  be  in  a  position  to 
furnish  to  his  colleagues  any  information  regarding 
the  value  of  stocks,  bonds,  and  securities  of  all  kinds. 


,«  un.  ^Z„  B..««  »««*^  "^CES  «»  Oraa  OET/UU  BY  MOKIHS 

2nd   **    Average  Loan 

Srtf    **    Maximum  Loan 

4tti    **    Foreign  Items  Collected 

9th    »*    Exchange  Collected 

* 

Jan.       Feb. 

March 

April      May      June      July      Aug. 

StvL 

Oct 

Nov. 

Dec 

1 
2 
3 
4 

9 
1 
2 
3 

4 

__i 1 1 

Name 

AridrPim                                                  Business                             1 

In 

iriMiucMl  t»y                                Accepted  by                                            Opened                              | 

«r 

Av.  Balance 

Av.  Loan 

M 
Fo 

aximum  Loan 

reign  Items 

Exchange  CollectM 

Checks  Returned  ac  N.  S.  F. 

5 

Dun                                                                                                                          

1 

Bradstreet 

Ai 

ite 

isets 

3 

Uabilitiea 

4 

Net 

— = 

5 

Aaaets 

1 

3 
4 

i 

UabilHies 

NetQuMc 



L 
A 

ne                mrcci                B.  R.               Interest                  Rate              Less 

uthoritY  to  Borrow 

JjijlUiuetj^ , , , , . r          T J 1 it^    1 

l«* 


Figures  45  and  46:  The  upper  card  shows  a  customer's  average  bank 
balance  by  the  month  while  the  other  contains  a  history  of  his  finan- 
cial   condition,   making    possible    the    various    yearly    comparisons. 


Figure  47:  When  investigating  commercial  or  negotiable  paper 
offered  by  brokers  in  the  open  market,  one  bank  finds  the  above  com- 
pact form  practical  for  listing  a  summary  of  the  results  obtained. 

169 


f    l! 


PfMI 


I    H 


I 

I 


|l  t 


It, 


170 


PREVENTING  CREDIT  LOSSES 


This  requires  a  personal  knowledge  of  current  market 
values,  close  touch  with  the  financial  world,  and  a  fund 
of  special  information  filed  away  for  ready  reference. 

And  not  only  does  he  serve  his  own  bank,  but  he  is 
ready  at  all  times  to  pass  on  his  information  to  other 
financial  institutions.  This  is  more  or  less  an  exchange 
of  courtesy  between  the  banking  houses  and  not 
infrequently  the  credit  managers  of  the  two  banks 
will  compare  the  information  they  have  obtained  on 
a  concern  through  their  separate  investigations.  The 
credit  man  of  the  city  bank  is  also  called  upon  by  the 
country  bank  correspondents  to  check  over  lists  of 
commercial  paper  which  they  are  offered,  thus  practi- 
cally giving  the  advice  of  the  bank  as  to  the  safety  of 
such  investments. 

It  is  thus  apparent  that  the  general  task  of  keeping 
in  touch  with  and  recording  market  reports  and  infor- 
mation covers  a  fairly  wide  range  of  activities.  It 
would  be  impossible  to  go  into  all  the  details  of  so 
comprehensive  and  diversified  a  subject  in  one  chapter, 
because  of  the  greatly  differing  make-up  financially  of 
various  communities.  Many  banks  in  small  towns 
and  cities  have  no  need  for  the  elaborate  system  of 
watching  and  fiUng  market  information  often  deemed 
necessary  in  the  large  financial  centers. 

This  chapter,  therefore,  should  be  considered  sug- 
gestive of  the  importance  to  every  banker  of  knowing 
the  trend  of  the  market  so  far  as  the  welfare  of  his 
institution  and  of  his  customers  is  concerned,  rather 
than  as  pointing  out  specific  methods,  except  in  a 
general  way,  for  accomplishing  the  desh-ed  results. 
Above  all,  it  is  essential  to  keep  in  mind  the  value  of 
market  information  to  safeguard  the  bank's  interests 
and  to  gather  it  and  file  it  in  a  practical  way.  The 
influence  of  such  activity  will  have  considerable 
bearing  on  the  profits  of  any  bank,  whether  it  is 
located  in  city  or  country. 


CHAPTER  XIII 
EXCHANGING  CREDIT  INFORMATION 

WHEN  a  bank  has  exhausted  its  own  immediate 
channels  for  obtaining  credit  information,  it 
still  has  other  sources  from  which  to  obtain 
corroborative  reports  as  set  forth  in  Chapter  V.  The 
accepting  of  this  service,  however,  impHes  the  obUga- 
tion  of  giving  in  return,  when  requested,  information 
to  other  banks,  business  houses,  and  conmiercial 
agencies.  As  a  result,  a  reciprocal  interchange  of  credit 
findings  has  developed  to  help  banks  solve  their 
lending  problems. 

At  the  same  time,  too,  this  exchange  of  confidence 
has  brought  with  it  all  sorts  of  requests  which  either 
must  be  ignored,  acknowledged,  or  answered  in  full. 
Banks  probably  more  than  any  other  financial  agency 
are  bombarded  with  credit  inquiries.  Many  a  credit 
man  in  business  probably  looks  upon  banks  as  a 
cynosure  in  this  regard,  whether  he  is  usually  successful 
in  obtaining  valuable  information  or  not. 

Considered  from  all  standpoints,  then,  how  is  the 
bank  going  to  get  information,  exchange  it,  and  give 
it  to  others,  and  still  maintain  a  proper  balance  between 
service,  expense,  and  profits?    In  other  words — 

How  can  the  bank  handle  interchange  of  informa- 
tion at  minimum  cost? 

How  can  it  give  the  proper  credit  service  necessary 
to  raise  the  general  standard  of  credit  risks  and  yet 
not  be  imposed  upon? 

171 


II) 


1 1 . 


. 


172  PREVENTING  CREDIT  LOSSES 

First   let   us   consider   the   routine   and   methods 
found  useful  by  banks  for  exchanging  credit  facts. 

A  Minneapolis  bank  finds  it  profitable  to  exchange 
Mormation,  not  only  with  other  banks  in  the  usual 
friendly  way,  but  also  with  manufacturers  and  jobbere. 
In  its  offering  books  the  credit  manager  tries  to  mclude 
the    statements    of    suppUers    regarding    borrowing 
customers  as  additional  corroborative  facts.   In  return 
the  bank  is  wiUing  without  betraying  confidence  to 
furnish  similar  reports  to  those  whose  services  it  has 
enjoyed.   The  credit  manager  does  not  use  form  letters 
to  make  inquiries  of  this  sort.    He  writes  a  Personal 
letter  to  one  of  the  officers  and  explains  just  what  he 
wants  to  know.   It  takes  a  little  longer  but  the  results 
are  worth  far  more  in  the  long  run.   He  has  proved  to 
his  own  satisfaction  that  credit  facts  worth  havmg 
are  worth  his  personal  attention. 

In  fact,  not  only  does  this  credit  manager  save  in 
the  long  run  on  postage  and  stationery  formerly  lost 
by  sending  out  form  letters  which  never  were  answered, 
but  he  saves  hours  of  time  from  day  to  day  by  getting 
more  information  and  getting  it  quicker.  His  credit 
files  are  thus  more  complete  than  they  have  ever  been 
and  he  is  practically  on  personal  terms  with  mnumer- 
able  sources  of  credit  data.  \ 

Investigation  shows  that  this  is  the  experience  of 
many  other  banks.  Personal  letters,  therefore,  appar- 
ently are  most  useful  for  certain  types  of  mquines 
where  a  profitable  personal  relationship  Js  estab- 
lished and  where  a  practicable  interchange  of  informa- 
tion is  possible.     The  cost,  considenng  the  results 

obtained,  is  slight.  . 

What  annoys  many  banks,  however,  more  than 
anything  else  along  this  line  is  the  bombardment  they 
are  subjected  to  from  many  sources  calling  for  mfor- 
mation.  This  is  a  problem  that  has  puzzled  ahnost  aU 
banks  alike.    John  Harris,  a  clothmg  merchant,  20 


THE  CITIZENS  BANK 

ANDERSON.  INDIANA 

Submits  the  following  information  in  strict  confidence  in 
reply  to  your  inquiry. 

All  persons  are  informed  that  any  statement  on  the  part  of 
this  Bank  or  any  of  its  officers  as  to  the  responsibility  or  stand- 
ing of  any  person,  firm  or  corporation,  is  a  mere  matter  of 
opinion,  and  given  as  such,  and  solely  as  a  matter  of  courtesy, 
and  for  which  no  responsibility,  in  any  way,  is  to  attach  to 
this  Bank  or  any  of  its  officers. 

Our  reply  is  the  paragraph  checked  below. 

We  regard  the  party  inquired  for  favorably  and 
think  you  are  safe  in  extending  any  reasonable  credit. 
They  are  reported  to  care  for  their  obligations 
promptly  and  in  a  satisfactory  manner,  and  to  be 
in  good  standing  in  every  way. 


The  party  inquired  for  is  limited  as  to  means  but 
enjoys  a  good  reputation  and  takes  good  care  of  obli- 
gations, so  far  as  we  have  ever  heard.  No  complaints 
of  any  kind  have  reached  us. 


Our  knowledge  of  the  party   inquired   for  is  too 
limited  to  make  our  report  of  any  value  to  you. 


The  party  is  unknown  to  us. 


We  prefer  not  to  make  a  report  of  any  kind  upon  this 
party. 


Figure  48 :  The  problem  of  handling  satisfactorily  all  inquiries  from  vari- 
ious  sources  asking  for  credit  information  has  puzzled  most  bankers. 
An  Indiana  banker  uses  this  form  letter  which  serves  the  purpose  in 
all  respects.    It  furnishes  a  courteous  reply  and  requires  no  writing. 

173 


174 


PREVENTING  CREDIT  LOSSES 


1  I 


miles  away,  writes  to  know  if  Henry  Peterson  has  any 
money  on  deposit  and  how  much.  Kenyon  and 
Company,  a  concern  the  credit  manager  has  never 
heard  of,  sends  a  form  letter  asking  if  Peter  Nolan  is 
good  for  a  purchase  amounting  to  $500.  Is  it  good 
judgment  or  ethical  to  throw  these  letters  into  the 
waste  basket?  Yet  the  bank  must  make  a  profit  and 
its  employees  cannot  spend  all  their  time  answering 
inquiries  without  some  sort  of  compensation,  even  if 
it  is  only  reciprocal  service  of  intangible  sort. 

HOW  AN  INDIANA  BANKER  HANDLES  THE  "INQUIRY  NUISANCE" 
WITH  SATISFACTION  TO  ALL  CONCERNED 

Here  is  one  serious  problem  for  the  credit  manager. 
If  he  realizes  the  broader  elements  of  the  proposition 
he  will  see  that  it  can  hardly  be  solved  satisfactorily  by 
igHoring  this  phase  of  it.  And  yet,  even  the  postage 
involved  in  answering  so  many  letters,  even  while 
declining  to  vouchsafe  much  of  the  infonnation 
wanted  on  the  groimd  that  it  would  be  betraying  the 
confidence  of  his  depositors,  is  quite  an  item  to  be 
charged  against  the  credit  manager. 
.  N.  M.  McCuUough,  president  of  the  Citizens  Bank 
of  Anderson,  Indiana,  has  greatly  minimized  what 
usually  is  termed  the  'inquiry  nuisance"  by  using  a 
special  form  for  rephes  to  all  requests  from  concerns 
with  which  the  bank  has  no  dealings.  This  form, 
which  has  been  so  effective  in  its  results,  is  shown  in 
Figure  48.  Mr.  McCuUough  worked  out  the  slip  from 
his  own  experience  in  a  smaller  city  bank.  It  has 
saved  much  time  for  him  and  for  his  employees  who 
handle  credit  information,  and  settles  to  his  satis- 
faction this  difficult  problem  of  the  country  banker. 

Providing  the  bank  has  the  data  and  sees  no  reason 
for  withholding  it,  the  credit  officer  or  an  assistant  can 
fill  in  the  form  quickly  and  slip  it  in  the  retm*n  envelop 
for  mailing.    Notice  how  simple  and  short,  yet  clear 


CREDIT  INTERCHANGE  METHODS         175 

and  complete,  each  answer  is.  The  first  answer  has 
extra  lines  for  any  additional  data  the  bank  may  see 
fit  to  give.  Otherwise  no  writing  of  any  sort  is 
necessary.  Only  the  square  covering  the  correct 
reply  is  checked.  Many  banks  probably  would  find 
a  slip  of  this  sort  worth  using  to  cut  down  clerical 
costs,  for  which  often  there  is  no  compensating  return. 
Besides  it  furnishes  a  courteous  method  of  reply  and, 
as  has  been  the  experience  of  the  Indiana  bank,  it 
would  sometimes  mean  obtaining  reciprocal  help  from 
other  banks  or  concerns. 

The  credit  officer  of  the  Citizens  State  Bank  of 
Jewell,  Kansas,  similarly  has  met  the  problem  satis- 
factorily by  using  a  form  like  that  reproduced  in 
Figure  49.  He  answers  so  far  as  he  is  able  each  bona 
fide  inquiry  received  and  attaches  this  notice.  The 
friendly  and  yet  forceful  character  of  the  request  for 
the  25-cent  fee  usually  brings  the  stamps  by  return 
mail.  Not  always,  of  course,  but  the  percentage  is 
large  enough  to  cover  the  expense  involved.  And  it 
is  much  more  satisfactory  to  the  bank  officers  to  feel 
that  they  are  cooperating  to  make  credits  generally 
more  safe.  Broad-minded  inquirers  appreciate  the 
service  and  willingly  pay  the  fee.  "Spongers"  rarely 
ask  again  for  free  information. 

A  New  York  banker  says:  **Our  inquiries  are  largely 
from  manufacturers,  jobbers,  and  metropoHtan  retail 
merchants  selling  household  goods.  We  are  not 
bothered  a  great  deal,  however,  so  we  do  not  feel  the 
privilege  is  abused.  Of  course,  we  do  have  some 
inquiries  from  all  over  the  coimtry  asking  about  people 
we  never  heard  about  or  dealt  with.  We  do  not  take 
the  time  to  write  any  letter  in  response  to  these 
requests.  We  simply  indorse  on  their  inquiry:  *Has 
no  account  and  we  are  not  acquainted.'  Usually 
stamps  or  stamped  return  envelops  accompany  the 
inquiries,  so  we  have  little  expense,  and  yet  we  are 


I 


h 


I  I 


(fmzms  #fab  ^k 


CAPITAL  $50,000.00 


JEWELL.  KANSAS. 


491 


GENTLEMEN: 

We  return  herewith  the  credit 
statement  for  which  you  ask,  and 
trust  it  gives  you  the  desired  infor- 
mation. 

Feeling  that  this  report  will  he 
of  value  to  you,  and  inasmuch  as  it 
cannot  be  made  without  expense  on 
our  part,  we  have  established  a  min- 
imum charge  of  25  cents  for  this 
service,  and  ask  that  you  send  us 
stamps  for  this  amount. 


CITIZENS  STATE  BANK 


By 


I 


I    I 


Figure  49:  One  bank  solved  the  problem  of  making  a  reasonable 
charge  for  credit  information  by  using  this  form  letter.  The  large 
nimiber  of  inquirers  who  willingly  complied  with  the  request  made 
demonstrates  that  most  business  men  are  ready  to  pay  ftcx"  this  service. 

176 


CREDIT  INTERCHANGE  METHODS 


177 


extending  to  the  general  field  the  courtesy  of  a  reply 
to  each  letter  we  receive/' 

Obviously,  banks  in  certain  localities  will  have  far 
more  inquiries  to  dispose  of  than  those  in  others, 
depending,  of  course,  on  general  credit  conditions, 
the  purchasing  power  of  the  community,  the  type  of 
industrial  or  farming  development,  and  so  on.  A 
definite  standard  for  handling  inquiries,  however,  has 
proved  valuable  in  a  number  of  banks. 

A  greater  freedom  of  expression  and  of  cooperation 
between  banks  and  credit  men  is  also  helping  to  meet 
this  situation  adequately.  To  show  the  necessity  of 
formulating  a  definite  way  of  handling  inquiries,  let 
us  consider  briefly  an  analysis  of  84  inquiries  which 
William  Tonks,  credit  manager  of  the  First  National 
Bank  of  Cleveland  received  in  a  single  day.  He  grouped 
them  as  follows: 

I.  Twenty-four  inquiries  were  on  our  depositors — 
10  being  borrowers — 7  from  bankers. 

II.  Thirty-three  inquiries  were  on  depositors  in 
other  institutions — 14  (estimated)  are  borrowers — 9 
from  bankers. 

III.  Nineteen  were  inquiries  from  bankers  on 
brokers'  paper. 

IV.  Eight  miscellaneous  inquiries  were  relative  to 
stocks,  bonds,  banks,  and  so  on. 

An  analysis  of  groups  of  the  57  letters  of  classifica-* 
tions  I  and  II  showed  that — 

38  were  form  letters. 

12  gave  the  street  address  of  the  subject  of  the  inquiry. 

9  gave  the  nature  of  the  business  of  the  subject  of  the  inquiry. 

5  gave  the  amount  of  the  order  or  the  reason  the  inquiry  was 
being  made. 

3  did  not  enclose  a  stamped  return  envelop. 

21  said  they  would  treat  the  information  confidentially. 

9  were  from  trade  agencies  which  sell  the  information  to  their 
clients  and  do  not  offer  to  reciprocate  except  at  a  price. 


P 


m 


^,  I 


m 


178  PREVENTING  CREDIT  LOSSES 

"We  ascertained,"  says  Mr.  Tonks,  ''that  at  least 
eight  made  the  same  inquiries  of  other  banks  in  this 
city,  but  did  not  mention  the  fact.  They  call  this 
sending  out  '  feelers.'  Two  gave  credit  information  of 
value  to  the  banker,  one  statmg  his  ledger  experience 
and  the  other  giving  important  figures  as  well  as  trade 
opinions.  Therefore,  two  only  out  of  the  total  had  the 
essentials  in  their  letters  of  inquiry." 

This  resume  indicates  the  difl&culty  that  many  banks 
encounter  in  handling  this  problem.  Mr.  Tonk 
further  says  of  banks  in  general:. 

"Daily  they  are  called  upon  for  credit  data,  when 
the  rule  of  the  bank  is  not  to  divulge  information 
relative  to  a  balance  or  even  acknowledge  the  fact 
that  a  savings  account  is  carried  by  the  subject  of 
the  inquiry.    Is  any  bank  to  be  criticised  if  it  cannot 
give   satisfactory   information   relative    to   a   small 
commercial  depositor  who  does  not  borrow,  has  no 
hne  of  credit,  and  has  presented  no  statement?    Is  he 
not  just  as  much  a  cash  customer  of  the  bank  as  he  is 
of  any  business  concern  to  which  he  pays  cash  for  goods 
purchased?   In  fact,  true  credit  references  are  creditors 
or  those  in  a  position  to  be  acquainted  with  the 
probable  net  worth,  the  income,  or  the  habit  of  pay 
of  the  subject.    I  have  always  admired  the  business 
sagacity  of  the  man  who  files  a  property  statement 
where  his  commercial  account  is  maintained — who, 
even  when  not  borrowing,  estabUshes  a  line  of  credit, 
and  asks  his  banker  to  verify  these  facts  to  those 
entitled  to  the  information.    In  the  absence  of  such 
keen  foresight  on  the  part  of  his  client,  the  banker  is 
the  one  to  determine  whether  the  information  is  per- 
sonal or  confidential,  and  whether  it  may  be  divulged. 
Perhaps  the  majority  of  credit  men  could  correct  some 
of  thdr  old  habits  and  obtain  better  results." 

Mr.  Tonks  emphasizes  the  thought  that  bankers 
should   not   be   called   upon   to   answer   hit-or-miss 


/ 


CREDIT  INTERCHANGE  METHODS         179 

inquiries  that  do  not  conform  to  the  rules  laid  down  by 
the  National  Association  of  Credit  Men  at  their  meet- 
ing in  1915.    These  rules  are: 

1.  The  blank  approved  and  adopted  by  the  National  Association 
of  Credit  Men  for  the  making  of  inquiries  shall  be  used. 

2.  The  blank  shall  always  indicate  the  nature  of  the  business  in 
which  the  subject  is  engaged. 

3.  Each  inquiry  shall  state  the  amount  of  the  order  which  leads 
to  making  the  inquiry,  and  in  addition  indicate  if  it  is  a  first  order. 

4.  If  the  inquirer  has  had  previous  experience  with  the  one 
inquired  about,  then  the  inquiry  shall  be  accompanied  by  a  state 
ment  of  such  experience,  thus  encouraging  that  reciprocal  inter- 
change of  experience  without  which  the  inquiry  becomes  unfair. 

5.  Inquiries  are  not  to  be  made  except  on  orders  actually  in 
hand  or  on  an  open  account. 

6.  Inquiries  shall  be  made  only  through  properly  constituted 
credit  departments — inquiries  by  salesmen  shall  not  be  permitted. 

7.  It  is  essential  that  there  shall  be  no  promiscuous  inquiries 
sent  out  with  the  idea  of  determining  what  concerns  have  had 
experience  with  the  subject  of  the  inquiry,  for  promiscuous  in- 
quiries may  do  harm  to  the  customer  and  impose  unnecessary 
burdens  upon  the  credit  department. 

8.  All  inquiries  are  to  be  answered  on  the  day  received  and  by 
the  credit  man  or  manager  if  possible,  so  that  not  only  ledger 
experience  may  be  supplied,  but  any  additional  valuable  informa- 
tion in  the  possession  of  the  informant. 

The  Robert  Morris  Club,  composed  of  bank  credit 
men,  has  adopted  these  rules  for  handling  inquiries: 

1.  The  first  and  cardinal  principle  of  credit  investigation  is  the 
sacredness  of  the  replies,  and  any  violation  of  this  principle  places 
the  violator  beyond  the  pale  of  consideration  of  the  honest  credit 
man. 

2.  Every  letter  of  inquiry  should  indicate  in  some  definite  and 
conspicuous  manner  the  object  of  that  inquiry. 

3.  When  more  than  one  inquiry  on  the  same  subject  is  simul- 
taneously sent  to  the  banks  in  the  same  city,  the  fact  should  be 
plainly  set  forth  in  the  inquiries. 

4.  Individual  consideration  by  the  recipient  of  a  credit  inquiry 
of  distinguishing  marks  therein  will  increase  the  efficiency  of 
credit  investigation. 


p 


I 


180 


PREVENTING  CREDIT  LOSSES 


til 


1 


If 


5.  Indiscriminate  revision  of  files  regardless  of  the  presence  of 
the  note  in  the  market  is  unnecessary,  wasteful  and  undesirable. 

6.  The  continued  observance  of  high  ethical  principles  in  the 
conduct  of  the  credit  departments  of  banks  and  banking  institu- 
tions insures  the  best  results  and  cooperation  in  safeguarding 
banking  credits. 

7.  It  is  not  permissible  nor  the  part  of  good  faith  in  soliciting 
accounts  from  competitor  to  seek  information  from  the  com- 
petitor without  franidy  stating  the  object  of  the  inquiry. 

8.  In  answering,  the  source  of  the  information  should  not  be 
disclosed  without  permission  and  letters  written  in  answer  to 
inquiries  should  be  held  inviolable  by  the  recipients. 

9.  In  seeking  information  the  name  of  the  inquirer  in  whose 
behalf  the  reference  is  made  should  not  be  disclosed  without 
permission. 

10.  In  answering  inquiries  it  is  advisable  to  disclose  all  material 
facts  bearing  on  the  credit  of  the  borrower  to  the  end  that  the 
paper  offered  in  the  open  market  be  of  the  same  description  as 
that  held  by  the  borrower's  own  bank. 

Behind  these  rules,  at  the  time  they  were  passed, 
were  219  banks.  Other  financial  institutions  have 
found  this  *' creed"  to  be  of  much  benefit,  for  it  indi- 
cates the  standards  bank  credit  officers  except  in  others 
who  seek  credit  information. 

Some  banks  have  adopted  a  notice  slip  which  they 
return  with  inquiries  incorrect  in  form.  The  purpose 
of  these  slips  is  gradually  to  educate  inquirers  to  a 
better  sense  of  credit  interchange.  This  slip  is  illus- 
trated in  Figure  50. 

Mr.  Tonks,  who  has  studied  this  question  for  several 
years,  emphasizes  the  fact  that  credit  managers  should 
be  careful  to  discourage  any  practice  that  is  likely  to 
;  interfere  with  a  liberal  interchange  of  credit  informa- 
tion. Even  though  it  may  mean  temporary  loss  of 
time  he  feels  that  all  credit  men  should  take  a  firm 
stand  for  the  principles  of  reciprocity. 

He  also  outlines  what  he  believes  is  a  model  inquiry 
letter  to  be  received  by  banks.  No  doubt  many  bankers 
aU  over  the  coimtry  can  help  raise  the  standard  of 


ll  .; 


CREDIT  INTERCHANGE  METHODS         181 

interchange  by  impressing  these  ideas  on  their  cus- 
tomers, their  correspondents,  and  inqmrers  in  general. 
The  outUne  follows: 

1.  Use  no  form  letter,  especially  in  addressing  city  bankers  who 
dictate  replies  and  retain  copies  conforming  to  their  own  office 


1 


This  Inquiry  is  Improper  In  form  and  does  not  conform  to  th©  rules 
of  reciprocity  adopted  by  the 

NATIONAL  ASSOCIATION  OF  CREDIT  MEN 

We  ar«  therefore  returning  it  herewith  for  correction  and  would  call 
your  attention  to  the  reasons  checked  below. 

We  will  gladly  answer  all  inquiries  made  in  tiie,  correct  form. 

1.  No  stamped  return  envelop. 

2.  Your  experience.  i.  


3.  Amount  of  first  order.. 


Signed. 


Figure  50:  In  order  to  raise  the  standard  of  interchanging  credit 
facts,  some  banks  return  all  requests  made  in  incorrect  form.  By 
attaching  this  slip  the  desired  result  is  obtained  without  offending. 

system.  If  the  office  boy  or  typist  makes  your  inquiries,  which 
means  seeking  important  information  with  as  little  effort  as  possible, 
just  how  much  attention  are  you  entitled  to  receive  from  the  banker? 

2.  WTien  possible,  direct  your  letter  to  the  credit  man,  usmg 
the  classified  trade  directory  of  membership  issued  by  the  national 
association. 

3.  Give  the  full  name  or  title,  correctly  spelled,  of  the  firm, 
individual,  or  corporation,  you  desire  to  know  about. 

4.  If  in  a  city  of  any  size,  give  the  street  address  and  business 
of  the  subject  of  the  inquiry.  If  the  credit  man  has  no  information 
in  his  files,  he  may  know  someone  in  the  locality  or  in  the  trade 
who  will  give  the  data  necessary  for  a  suitable  answer.  The  street 
address  also  identifies  the  subject  of  the  inquiry  and  is  a  protection 
against  the  fraudulent  use  of  mercantile  ratings,  a  trick  often 


«    I 


,' 


l>:  1± 


l\   "l 


182 


PREVENTING  CREDIT  LOSSES 


worked  with  an  unsolicited  first  order  and  possible  because  the 
mercantile  agencies  do  not  give  street  addresses. 

5.  If  a  first  order,  give  the  amount  of  credit  sought.  If  an  old 
customer,  give  at  least  your  ledger  experience.  While  the  subject 
may  be  entitled  to  a  credit  of  $100,  the  banker  might  know  that 
$5,000  would  be  excessive. 

6.  State  why  you  are  making  the  inquiry  or  what  experience 
prompted  your  questions.  If  you  are  simply  checking  one's 
reputation  for  honesty— the  moral  risk— so  state.  If  there  has 
been  any  change  in  methods  of  pay,  or  you  have  had  any  favorable 
or  unfavorable  experience,  do  not  fail  to  mention  the  fact.  Con- 
fidence begets  confidence.  You  should  know  that  the  bank  credit 
man  is  seeking  information,  that  he  must  build  up  his  own  files, 
that  he  is  handicapped  in  many  towns  and  cities  from  the  lack 
of  ledger  interchange.  Letter  after  letter— and  the  bankers 
themselves  are  just  as  guilty  as  the  mercantile  credit  men— are 
written  in  the  old  grind  form,  "regarding  the  financial  responsi. 
bility,  busmess  abihty  and  character,"  when  probably  all  the 
information  desired  is  "why  is  the  customer  becoming  slower?" 
or,  "is  he  worthy  of  a  credit  of  $100  ?  "  and  so  on.  Careless  in- 
quiries bring  careless  replies  or  none  at  all. 

7.  Assure  the  banker  that  you  will  hold  the  answer  exclusively 
for  your  own  files  and  mean  it  to  the  extent  of  religiously  enforcing 
this  rule  in  your  own  credit  office.  If  you  are  seeking  legitimate 
information  for  another,  at  least  hold  sacred  the  source  of  your 
information,  particularly  if  adverse  in  nature.  If  you  lend  yourself 
to  making  inquiries  not  intended  for  your  own  use,  but  to  disguise 
the  source  of  inquiry,  don't  be  surprised  if  many  credit  men  hear 
of  this  injury  you  have  done  to  a  system  that  has  taken  years  of 
education  to  establish. 

8.  If  you  have  met  the  credit  man  at  a  convention,  mention 
the  fact,  or  in  other  ways  give  a  personal  and  intimate  touch  to 
your  letter.  Personal  acquaintanceship  often  brings  the  "extra 
ounce"  of  information  you  are  seeking. 

9.  Enclose  a  stamped  return  envelop. 

^^  "Credit  is  indispensable,"  concludes  Mr.  Tonks, 
"and  in  whatever  form  it  may  be  given,  the  banker  is 
ultimately  interested;  therefore,  he  must  encourage 
sound  credits  as  much  as  possible,  which  he  cannot  do 
by  discouraging  legitimate  methods  of  acquiring  credit 
data.    He  may  gain  pennies  by  charging  for  his  ser- 


CREDIT  INTERCHANGE  METHODS         183 

vices  in  answering  inquiries,  but  he  is  not  contributing 
his  share  to  the  cause  of  sound  credits  and  the 
abridgment  of  the  bad-debt  waste.  This  attitude 
appears  short-sighted  in  serious  times  when  all  credit 
men  must  work  together.  In  times  of  peace,  as  well  as 
when  war  conditions  must  be  met,  any  experienced 
bank  credit  man  knows  the  value  of  ledger  informa- 
tion or  trade  opinions  in  anticipating  the  many  things 
that  may  happen  between  statement  periods. 

"In  this  respect  my  opinion  is  that  the  mercantile 
credit  man  is  just  as  much  entitled  to  compensation 
for  his  opinions  or  experience.  The  proper  and  prac- 
tical attitude  for  the  banker  to  adopt  is  to  return  un- 
der the  inquirer's  own  postage  every  letter  of  inquiry 
that  does  not  conform  to  the  rules  established  by 
credit  men,  and  enclose  a  printed  slip  similar  to  the 
one  described  on  page  181,  but  which  will  take  little 
more  time  than  throwing  it  into  the  waste  basket.  In 
this  problem  the  banker  should  take  his  place  as  an 
educator  as  well  as  a  leader  in  good  business 
practices. ' ' 

To  sum  up,  then,  standardized  methods  for  inter- 
changing and  answering  credit  information  mean  the 
improvement  of  the  general  credit  structure  which  in 
turn  means  better  banking  and  fewer  credit  losses. 


1 


■ 


III 


CHAPTER  XIV 
FILING  METHODS  THAT  SPEED  UP  THE  WORK 

SAFE  credits  depend  to  a  great  extent  on  the  way 
the  records  of  the  credit  department  are  kept. 
Careful  filing  has  much  to  do  with  the  satis- 
factory disposition  of  the  day's  business,  while  ade- 
quate equipment  for  handhng  the  routine  helps  to 
save  time  and  further  the  success  of  the  bank. 

In  Chapter  I  were  considered  phases  of  filing  and 
handhng  credit  information,  but  investigation  indicates 
the  unportance  of  considermg  these  subjects  more 
specifically.    Many  small  banks,  especially,  may  find 
It  possible  to  do  much  toward  perfecting  their  credit 
routine  by  making  their  files  do  more  and  better  work. 
Perfection  of  the  filing  routine  in  a  middle-western 
bank  enabled  the  officers  to  keep  such  accurate  track 
of  theu"  credit  folders  that  they  only  lost  trace  of  one 
out  of  several  hundred  during  a  period  covering  eight 
years.    Even  then,  cross-index  reference  cards  of  the 
customer's  history  still  gave  the  credit  department 
practically  all  the  information  necessary.    Considering 
the  size  of  the  fist  of  customers  this  unquestionably 
IS  a  good  showing,  made  possible  by  the  arrangement 
and    method    of    filing    the    records. 
^   This  bank  files  all  the  information  for  each  customer 
in  letter-size  folders  which  it  keeps  in  steel  files  just  a 
few  feet  to  the  left  of  the  credit  manager,  who  has  a 
clerk  and  a  stenographer  to  assist  him.    The  folders 
have  tabs  on  top  for  the  names  of  customers  and  are 
Wed   alphabetically.     Different   tiers  hold   ordinary 

184 


FILES  THAT  FIND  FACTS 


185 


commercial  loans,  commercial  paper  loans,  and  col- 
lateral loans.  For  each  classification,  the  folders  bear 
a  distinguishing  mark.  The  folders  holding  com- 
mercial paper  loans,  for  example,  have  pasted  in  their 
upper  left-hand  corner  a  blue  paper  star  (Figure  51). 
The  containers  for  ordinary  commercial  loans  are 
unmarked,  while  collateral  folders  carry  a  red  star. 

The  use  of  insignia  Hke  this  means  the  saving  of 
countless  hours  in  filing  during  the  course  of  a  year, 
many  of  these  folders  are  out  to  various  offices  during 
the  day.  At  night  most  of  them  are  returned  to  the 
credit  department,  to  be  filed.  Temporarily,  they  are 
placed  on  top  of  the  files  just  as  they  are  received. 
When  the  girl  comes  to  file  them,  she  knows  at  a 
glance  into  what  tier  of  files  each  folder  should  go. 
The  colored  stars  or  the  plain  container  tell  her  in- 
stantly where  to  put  each  one.  She  simply  glances 
at  the  name  to  maintain  the  alphabetical  arrangement. 
Guiding  signals  of  this  sort  have  also  minimized 
delays  in  finding  folders  desired  quickly.  As  a  mat- 
ter of  fact,  such  a  plan  in  either  a  small  or  large  bank 
should  help  to  save  time.  It  could  be  modified,  of 
course,  to  meet  individual  requirements. 

Supplementary  to  the  folders,  which  contain  the 
references  regarding  customers,  financial  statements 
and  other  data,  this  bank  keeps  auxiUary  records 
including  a  summary  of  each  borrowers  activities 
(Figure  52).  This  card  is  of  unusual  interest  because 
on  its  reverse  side  are  entered  the  figures  fm  the 
average  balances  by  quarters.  The  use  of  keylfetters 
as  indicated  shows  the  character  of  the  account  from 
year  to  year.  The  front  has  the  usual  spaces  for 
entering  the  name  and  other  data.  One  line,  however, 
is  worth  calling  attention  to.  It  reads,  ''references  in 
vertical  file.''  This  draws  direct  attention  to  the 
folder  for  the  same  customer  and  indicates  briefly  the 
character  of  the  references  obtained  regarding  him. 


il 


l\ 


if' 


Hjll 


/■.T.Htyt 


Figwe  51:  Credit  information  on  various  types  of  loans  is  filed  in 
folders  like  these  in  the  credit  department  of  one  bank,  the  class  of 
paper  being  indicated  by  different  colored  stars,  as  shown,  for  filing. 


STATISTICAL  AND  CREDIT  DEPARTMENT 

RECEIVED  the  following  files,  or  record  cards, 


for 


By. 


Pated, 


t» 


I 


Figure  53:     The  unwelcome  answer,  "I  don't  know  where  it  is, 
is  seldom  heard  in  the  credit  department  which  uses  this  receipt  form 
for  folders.    No  official  can  take  out  a  folder  without  signing  a  receipt. 

186 


AVERAGE  BALANCES 
A-Acthrj         Mnactivs         S-Steady         F-FIuctuatlng         O-Sometimes 
Aceount           Account           Balance               Balance               Overdrawn 

Datt 

balance 

Charac- 
ter 

Date 

Balance 

Charac- 
ter 

Date 

Balance 

Charac- 
ter 

Itt  0. 1914 
2ndQ.  1914 
3rd  Q.  1914 
4th  Q.  1914 
1st  Q.  1915 
2ndQ.  1915 
3rdQ.  1915 
4tfa  Q.  1915 
l8t  Q.  1916 
2ndQ.  1916 
3ntQ.  1916 
4th  Q.  1916 

l8t  Q.  1917 
2ndQ.  1917 
3rd  0.  1917 
4th  Q.  1917 
l8t  Q.  1918 
2ndQ.  1918 
3rdQ.  1918 
4tb  Q.  1918 
l8t  Q.  1919 
2ndQ.  1919 
3rdQ.  1919 
4th  Q.  1919 

l8t  Q.  1920 
2ndQ.  1920 
3rd  Q.  1920 
4th  Q.  1920 
l8t  Q.  1921 
2ndQ.  1921 
3rd  Q.  1921 
4th  Q.  1921 
1st  Q.  1922 
2ndQ.  1922 
3rd  0.  1922 
4th  Q.  1922 

^■^^ 

'  ■ 

' 

~ 

' " 

Remarks                                                   ' -^ '— ' ' 

^^■* 

Ck8.  Refd.  Acc't.  N.  S.  F.                                                               

Business 

References 

Connections 

Account  Opened 

Closed 

Reopened 

Closed 

Reopened 

Closed 

References  in  Vertical 

File 

Power  of  Attorney  t* 

Special  instructions.  Terms  and  so  forth 
Remarks: 

Reason 
Reason 
Reason 


Nttmber 


«      . 


I    ' 


Figure  52:  In  connection  with  a  file  of  folders  covering  facts  about 
customers,  one  bank  uses  this  additional  card  record.  Note  the 
reference  to  the  folder  in  the  vertical  file.  The  reverse  shows  bal- 
anccs  by  quarters,  and  keys  the  character  of  the  business  by  letters. 

187 


i^ 


Hi 


188 


PREVENTING  CREDIT  LOSSES 


FILES  THAT  FIND  FACTS 


189 


: 


k 


f 


^i 


These  cards,  also,  are  filed  alphabetically  and  furnish 
a  valuable  cross-index  record. 

How  to  keep  track  of  folders  that  go  out  to  officers 
is  a  problem  in  many  banks.  The  Northern  Trust 
Company,  of  Chicago,  which  has  a  file  arrangement 
similar  to  that  described,  has  met  the  need  successfully 
by  using  the  two  sUps  reproduced  in  Figures  53  and  54. 
Whenever  an  officer  wants  a  folder  or  any  record  from 
the  credit  files,  he  or  the  interhouse  messenger  is 
asked  to  sign  the  receipt  (Figure  53)  which  describes 
briefly  the  items  taken.  This  slip  the  credit  manager 
files  temporarily  on  a  spindle  on  his  desk.  He  expects, 
of  course,  to  receive  the  papers  back  at  the  close  of 
the  day.  If  they  are  returned  he  simply  destroys  the 
slip.  If,  however,  the  officer  is  not  through  with  the 
data,  a  notation  is  made  on  the  form  when  the  material 
may  be  expected  back. 

The  credit  manager  clips  to  each  item  taken  out  of 
the  department  the  notice  slip  (Figure  54),  and  it 
serves  as  a  danger  signal  to  insure  the  prompt  return 
of  all  docimients.  Even  if  a  bank  has  few  records 
comparatively,  ideas  Hke  this  for  keeping  careful  tab 
on  them  are  not  only  worth  while,  but  under  present- 
day  competition  are  practically  necessary. 

AN  INEXPENSIVE  WAY  OF  DISTRIBUTING  CREDIT 
INFORMATION  WITHOUT  UNNECESSARY  COPYING 

To  save  further  time  and  annoyance,  this  bank  has 
adopted  another  scheme  to  perfect  its  files.  Often,  as 
in  other  banks,  the  credit  manager  receives  a  letter 
from  another  bank  giving  credit  information  on  two 
or  three  or  perhaps  more  concerns.  Until  inaugura- 
ting this  plan  it  was  necessary  to  make  several  partial 
copies  of  the  letter  to  segregate  the  different  paragraphs 
for  each  folder  concerned.  Now,  however,  the  typist, 
following  notations  by  the  credit  manager,  simply 
cuts  the  letter  up  into  the  necessary  parts  to  cover  the 


information  on  each  name.  She  pastes  each  slip  on  a 
blank  sheet  and  adds  the  name  of  the  bank,  the  name  of 
the  officer  who  has  signed  the  letter,  and  also  in  the 
lower  left-hand  corner  the  names  of  each  of  the  other 


NOTICE 

This  file  is  charged  to  your  department  and 
must  be  returned  to  the  statistical  and  credit 
department. 

Under  no  circumstances  are  these  papers  to 
be  delivered  to  any  other  department. 


Figure  54:  One  trust  company  has  proved  the  value  of  the  old  adage, 
"An  ounce  of  prevention  is  worth  a  pound  of  cure,"  by  using  with  good 
results  the  form  shown  above  for  keeping  a  check  on  its  credit  folders. 

applicants  for  credit  mentioned  in  the  letter.  Thus  an 
adequate  record  is  ready  for  each  name.  Each  sheet 
can  be  filed  in  its  proper  folder.  If  at  any  time  the 
credit  manager  should  for  some  reason  desire  to  put  the 
original  letter  together  the  list  of  names  in  the  lower 
left-hand  corner  of  any  of  the  sheets  will  enable  him 
to  collect  the  ** pieces"  in  short  order. 

This  is  just  suggestive  of  the  numerous  plans  any 
bank  can  use  to  insure  careful  and  adequate  filing. 

How  necessary  it  is  for  bankers  to  reahze  the  impor- 
tance of  having  complete  credit  files  is  indicated  by  the 
statement  of  the  cashier  of  a  western  bank  which  is 
capitalized  at  $50,000. 


i. 


190 


PREVENTING  CREDIT  LOSSES 


''Our  work  in  the  insurance  department,"  he  says, 
"enables  us  to  keep  in  close  personal  touch  with  our 
customers  and  friends  in  the  country.  In  consequence 
we  have  not  found  it  necessary  to  keep  an  extensive 
credit  file.  However,  I  beheve  such  a  thing  would  be 
of  value  in  case  of  accident  to  either  the  president  or 
myself  which  would  require  new  managing  officers." 

The  statement  just  given  probably  describes  pretty 
accurately  the  conditions  in  many  banks  of  this  nation, 
and  the  lack  of  written  dependable  records  is  not 
alone  attributable  to  small  banks.  However,  country 
bankers  need  the  best  possible  filing  systems  and 
records  because  the  cost  to  them  of  investigations  and 
inquiries  is  often  greater  proportionately  than  to  city 
bankers.  Obviously,  with  present-day  competition 
there  should  be  no  hit-or-miss  handling  of  credits. 
The  personal  judgment  of  one  or  two  officers  cannot 
always  remain  with  a  bank.  Black  and  white  facts 
are  absolutely  essential,  even  if  they  are  only  in  the 
crude  form  of  memoranda. 

One  small  western  banker  provided  a  simple  but 
invaluable  record  of  credits  for  his  successor  by  entering 
on  blank  sheets  all  the  information  he  found  available 
regarding  each  borrower.  These  sheets  had  the  names 
of  his  customers  at  the  top  and  were  filed  alphabeti- 
cally in  a  looseleaf  binder.  Additional  information 
could  be  added  at  any  time.  Here  is  a  sample  page  of 
information  listed  in  this  way  and  it  illustrates  the 
value  of  transferring  office-in-the-hat  information  to 
a  permanent  record: 

George  White,  R.  R.  3,  Burnside.  June  10,  1910.  Renter  of 
an  80-acre  farm  owned  by  Dan  Waters,  located  in  the  southern 
part  of  Jackson  Township,  six  miles  northwest  of  town;  is  feeding 
20  head  of  steers  that  are  not  ready  for  sale,  and  wants  to  borrow 
$100  to  buy  feed.  He  promises  to  do  all  his  business  with  us  as 
soon  as  cattle  are  sold.  His  statement  shows  no  real  estate,  and 
about  $2,000  net,  in  personal  property.  After  careful  considera- 
tion we  let  him  have  the  money. 


FILES  THAT  FIND  FACTS 


191 


June  15,  1910.  Saw  Dan  Waters  today.  He  says  White  is  an 
excellent  tenant,  thrifty,  good  habits. 

July  5,  1910.  Met  cashier  of  Jamesport  Bank,  who  spoke  well 
of  White  and  says  he  is  all  right  in  a  small  way. 

September  20,  1910.  Records  show  that  White  bought  60 
acres  in  Jackson  township,  paying  IS  1,000  cash  and  giving  deed 
of  trust  for  balance  of  $2,500.  He  made  money  on  cattle  recently 
sold;  is  a  good  trader. 

January  25,  1911.  He  is  going  to  buy  a  bunch  of  yearlings  and 
we  have  agreed  to  lend  him  the  purchase  price  to  be  secured  by 
chattel  mortgage. 

October  10, 1914.  Records  show  White  has  paid  off  deed  of  trust 
on  his  60  acres.  He  also  buys  100  acres  adjoining,  giving  deed  of 
trust  on  whole  160  acres  for  the  purchase  price,  $6,500.  Learn  he 
is  making  money  fast  and  will  work  his  own  farm  in  future,  renting 
only  when  he  needs  pasture. 

February  14,  1915.  Records  show  he  bought  45  head  of  steers 
in  Kansas  City  and  gave  chattel  to  commission  firm  in  that  city 
for  purchase  price. 

April  18,  1915.  Took  his  statement  today,  showing  net  worth 
of  $8,500;  says  he  made  above  cattle  loan  because  he  could  get 
money  cheaper  that  way.  Offered  to  lend  him  as  high  as  $1,000 
at  any  time  on  his  own  name  at  7%. 

November  20,  1917.  Lately  have  seen  his  checks  drawn  on 
Farmers  Bank,  Asked  him  about  it  today  and  he  said  it  is  only  a 
temporary  deposit  made  at  urgent  solicitation  of  their  cashier. 

March  18,  1918.  Learned  that  he  recently  bought  half  section 
of  Kansas  land,  which  he  sold  at  slight  loss  after  thinking  matter 
over. 

July  1,  1918.  Loaned  him  $2,500  with  his  wife  signing  the  note. 
This  is  part  purchase  price  for  80  acres  of  bottom  land  adjoining 
his  160  that  he  now  owns  clear.  Consider  him  worth  conservatively 
$15,000.  Takes  good  care  of  his  paper  and  does  all  his  business 
with  us.  Tried  to  induce  him  to  buy  five  shares  of  our  stock. 
He  says  he  will  think  it  over. 

A  record  like  this  would  be  of  great  help  should  a 
change  of  officers  take  place.  Ordinarily  if  credit 
files  are  complete,  there  would  be  additional  informa- 
tion in  actual  figures  to  show  specifically  in  black  and 
white  the  worth  of  the  borrower.  But,  at  least  some 
record  is  desirable. 


I  • 


m 


li 


192  PREVENTING  CREDIT  LOSSES 

Banks  which  use  folders  often  have  a  definite  order 
in  which  they  file  information.  This  enables  the 
credit  manager  or  any  officer  to  tell  instantly  just  where 
in  the  material  chpped  together  he  will  find  the  par- 
ticular item  of  information  he  wants. 

HERE'S  A  SIMPLE  WAY  OF  FILING  INFORMATION  THAT 
SAVES  TIME  WHEN  YOU  WANT  THE  FACTS  QUICKLY 

For  instance,  one  bank  puts  the  material  for  each 
folder  together  in  this  fashion:  on  top  is  the  offermg 
slip  giving  the  details  of  the  loan  and  whether  or  not 
it  is  approved;  then  comes  the  concern's  or  individual's 
last  statement,  below  which  are  the  letters  from  the 
applicant's  home  or  original  bank  or  banks;  next 
follow  letters  from  outside  banks;  then  trade  letters, 
agency  reports,  and  finally  old  and  comparative 
statements.  The  comparative  statement  sheet  al- 
though at  the  bottom  of  the  information,  is  turned 
right  side  out  so  that  any  officer  looking  at  the  material 
can  see  by  turning  the  folder  over  just  how  the  business 
has  been  going.  An  offering  slip  for  commercial  paper 
is  shown  in  Figure  55.  The  general  form  is  the  same 
for  other  types  of  loans.  Note  the  spaces  in  which 
the  lending  officers  place  their  initials  to  register 
approval  or  disapproval  of  the  loan.  The  space  at 
the  bottom  is  for  the  credit  manager  to  make  his  nota- 
tions, suggestions,  or  recommendations.  On  the  back 
may  be  listed  the  references  and  the  agency  reports. 

A  number  of  banks,  both  small  and  large,  find  it 
desirable  at  times  to  purchase  commercial  paper.  It 
is  well  to  have  concise  and  practical  records  both  for 
the  paper  itself  and  for  the  fist  of  brokers  from  whom 
it  is  purchased.  One  bank  uses  pink  and  white  cards 
for  this  purpose.  The  pink  cards  are  for  listing  the 
brokers'  names  and  the  paper  purchased  of  them 
(Figure  56).  The  data  entered  on  a  card  of  this  sort 
includes  the  date  of  purchase  from  each  concern,  the 


REFERENCES 


AGENCY  REPORTS 

BRADSTREIT 

DUN 

HILL'S 


BOUGHT  FROM 


OPTION  EXPIRES. 


.I91_ 
.191_ 


MBENT 

PUKHASC 


MATURITY 


MO.    MY  YEAR 


lATE 


INBORSOtt 

WARANTOitt  01 

COUATERAL 


OTHEI 

MATURITIES 

ON  HAND 


AfTMVEDiY 


AmiOVEOIV 


OIWm»VB>iY 


DISAPFROVED  VY 


MATURING 


MO.    DAY  YEAR 


BAUNCE  ON 

HAND  INCLUDING 

PRESENT 

PURCHASE 


lEMABKS 


Figure  55:  Here  is  shown  the  front  and  reverse  of  an  offering  slip 
which  one  bank  uses  for  its  commercial  paper.  As  all  the  facts  of  in> 
terest  to  the  officers  are  covered  on  the  face  of  this  form,  with  refer- 
ences on  the  reverse  side,  it  can  be  adapted  to  any  type  of  offering. 

193 


I  WIT  11 


!■ 


I 


Q)                                                            Total  Year 
Broker                                                                 ToUl  Year 

Total  Year 

Date  of 
Purchase 

Rate 

Name 

Amount 

Due 

Balance 

Total 

:      ® 

Broker                                                                                             | 

:     Date  of 
Purchase 

Rate 

Indorsed 

Balance 

Due 

Amount 

Due 

Amount 

- 

... 

M 

p" 

— 

— — — 

1 — 

— 

^ 

1— =±T' 

Figures  56  and  57:  These  records  are  valuable  to  one  banker  for 
keeping  a  ready  reference  record  of  all  commercial  paper  purchased. 
The  advantage  of  this  plan  is  described  in  detail  on  pages  192  and  196. 




njja 

■AUkKCI  1  CiaCU ,  CHSCXS 

CHICKS.  CMBCn 

TOTAL 

aacM 

OBKKirrtoN 

cnoin 

CWDIT* 

TOTAL 

cmxDm 

ram  ttrtmm.  lam 

•aiat.  Mi 

' 

■CH 

■OMTT  MB  im.mm  a» 

v-/ 

taximtn.  urn 

■■■iiie  nuRT  tm 

mm  im. 

2^     LXTTU  MO.   AM 

26 

ttmtm  mm  co 

urtu  wci.  in 

Figure  59:  This  compact  looseleaf  form  has  been  found  especially 
effective  by  a  Missouri  bank  for  recording  accounts  of  correspondent 
banks.    Total  checks  and  total  credit  figures  show  the  balances  on  hand. 

194 


DATE 


REPORT  ON  ACCOUNT 


Name. 


Address. 


Account  Opened_ 
Highest  Balance. 
Lowest  Balance. 


Average  Balance. 
Present  Balance. 
Overdrawn 


Active  or  Inactive. 

Checking  Account 

C/D  Account 


.Yes 
.Yes 


Discount  or  Collection Yes 


Trust  Department. 


.Yes. 


Real  Estate  Department_Yes. 

Savings  Department Yes_ 

Bond  Department Yes. 

Vaults Yes. 


Remarks. 


.No By. 

0 By. 

No By. 

No By. 


.No By. 

.No By. 

.No By. 

.No By. 


if 


Figure  58:  Believing  that  any  depositor  eventually  may  become  a 
borrower,  one  bank  finds  it  profitable  to  keep  a  record  like  this  of 
each  customer's  account.  This  shows  whether  he  is  managing  his 
finances  in  a   businesslike  way,   as   well   as  other  important  facts. 

195 


196 


PREVENTING  CREDIT  LOSSES 


FILES  THAT  FIND  FACTS 


197 


I 


11' 


names  of  the  concerns  and  the  amount  of  paper 
accepted  from  each  one.  The  amount  of  paper  out- 
standing from  each  broker  and,  where  practicable,  the 
amount  purchased  to  date  are  also  entered.  These 
cards  are  filed  alphabetically  in  a  steel  case. 

The  white  cards  (Figiu-e  57)  form  an  alphabetical 
record  of  concerns  from  which  commercial  paper  has 
been  purchased.  It  acts  as  a  cross-reference  file  for 
the  brokers'  index.  At  the  top  of  the  card  the  credit 
manager  enters  the  name  of  the  maker  of  the  paper 
and  just  below  the  name  of  the  broker  from  whom  the 
notes  have  been  obtained.  In  the  balance  column  is 
placed  the  last  figure  of  the  amount  of  paper  outstand- 
ing. Each  card  carries  the  rate  of  discount  on  each 
note.  These  records  are  of  great  help  in  compiling 
statistics  for  the  officers  and  they  also  show  the  trend 
of  this  branch  of  credits. 

With  complete  records  like  this  it  takes  but  little 
time  to  report  to  any  officer,  director,  or  other  person 
entitled  to  the  information,  the  exact  condition  of  an 
account.  For  this  purpose  the  credit  department  uses 
the  form  reproduced  in  Figure  58. 

A  bank  which  handles  the  accounts  of  correspondent 
banks  must  make  further  provision  for  filing  the 
records  of  their  activity  and  balances.  A  St.  Louis 
bank  finds  a  looseleaf  ledger  like  that  illustrated  in 
Figure  59  adequate  to  list  the  balance,  the  checks,  the 
credits,  and  the  totals  for  each  month. 

Investigation  indicates  that  banks  are  using  steel 
files  to  la  large  extent  'for  preserving  credit  records. 
Bankers  who  have  them,  uniformly  agree  that  they 
have  advantages  far  above  their  initial  cost.  A  steel 
file  makes  a  safe  receptacle  for  cards  and  folders  and 
it  saves  a  great  deal  of  time  because  it  does  not  have 
to  be  kept  in  a  vault.  Bankers  are  rapidly  disregarding 
the  process  of  bringing  all  of  these  auxihary  credit 
records  from  the  vault  each  morning  and  trundling 


them  back  again  at  night.  They  are  eliminatmg  this 
confusion  and  loss  of  time  by  placing  steel  files  per- 
manently wherever  they  are  required  in  the  credit 
department.  Thus  the  credit  manager  has  quick 
access  to  them  at  all  times.  He  can  handle  his  work 
quicker  and  the  clerical  help  does  not  have  to  wait  for 
tools  to  work  with.  There  are  many  types  of  files, 
of  course,  so  it  is  not  difficult  for  a  bank,  even  though 
it  is  small,  to  choose  the  sizes  and  styles  best  suited  to 
its  requirements.  Some  banks  consider  certain  auxil- 
iary  card  records  of  insufficient  value  to  file  m  steel 
cases,  while  others  have  a  complete  equipment  of 
steel  for  the  purpose.  . 

F.  F.  Tillotson,  assistant  cashier  of  the  Dune  Savings 

Bank,  of  Detroit,  says: 

''In  order  to  save  all  the  tune  we  can,  we  have  ail 
of  our  credit  records  as  well  as  others  so  far  as  is  possible 
in  steel  files  or  filing  cases,  which  enables  each  worker 
to  have  at  his  elbow  all  the  records  he  requu-es.  This 
saves  a  lot  of  tune  foraierly  spent  by  employees  m 
traveling  back  and  forth  to  a  safe  or  vault.  Any 
papers  we  consider  of  sufficient  importance  to  put  m 
the  vault  at  night,  we  have  arranged  in  files  on  wheels 
so  they  can  be  easily  run  into  the  vault.  In  order  to 
save  the  time  of  the  officers  who  are  up  in  the  front  of 
the  bank,  we  have  built  an  extra  smaller  vault  near  the 
officers'  desks.  In  this  vault  we  keep  the  collateral  and 
other  records  regarding  loans,  which  we  have  found  we 
frequently  have  to  refer  to.'* 

The  arrangements  of  files  vary  greatly  according  to 
the  size,  the  structure,  and  the  organization  of  both 
small  and  large  banks.  The  plans  of  other  banks, 
therefore,  can  usually  be  considered  only  suggestive  of 
how  to  equip  and  arrange  the  credit  files  of  your  bank. 

One  credit  manager  has  all  of  his  files  du-ectly 
behind  his  desk.  They  form  a  low  partition  behind 
which  his  stenographer  and  clerks  have  their  desks. 


II 
I 


198 


PREVENTING  CREDIT  LOSSES 


ii 


I'iit 
'it 


The  arrangement  works  out  well  for  accomplishing 
without  confusion  the  daily  tasks. 

Still  another  bank,  which  has  developed  statistical 
records,  houses  its  credit  and  statistical  departments 
together  in  a  separate  room  away  from  the  cages  and 
routine  departments.  Here  all  of  the  credit  files  are 
kept  in  steel  cases  which  are  just  to  the  right  of  the 
stenographer  and  behind  the  credit  manager.  This 
arrangement  of  the  department  affords  every  facility 
for  handling  work  quickly. 

A  number  of  the  larger  banks  have  developed  a 
statistical  department  for  analyzing  credits.  Some 
smaller  banks  are  going  into  this  work,  too.  Usually 
the  records  are  important  enough  to  warrant  the  best 
of  steel  files.  In  fact,  some  banks  have  a  central 
filing  room  specially  protected  from  the  possibility  of 
fire  or  biu-glary,  and  in  this  room  clerks  file  all  important 
documents  dealing  with  credits. 

To  sum  up,  bank  credits,  of  course,  are  basic.  The 
continued  existence  of  a  financial  institution  is  depen- 
dent on  how  they  are  handled.  Therefore  no  record  is 
too  trivial  to  be  kept  and  filed  correctly  and  safely. 
Consequently,  too  much  thought  cannot  be  given  to 
this  phase  of  banking.  Obviously  the  bank  with  the 
credit  records  and  files  best  suited  to  its  progress  and 
safety  is  the  one,  other  conditions  being  equal,  which 
will  continue  to  prosper.  And  isn't  this  the  funda- 
mental aim  of  every  bank? 


l:i 


PART  IV 


COliLECTION  PLANS  THAT 
CUT  COSTS 


■1 


I* 


f!^ 


I 


CHAPTER  XV 

HOW  A  CLEARING  HOUSE  FOR  COUNTRY  ITEMS 

CAN  HELP 


BY  establishing  a  "country  clearing  house,  .he 
Detroit  Clearing  House  Association  accom- 
plished a  threefold  purpose.  It  eUmmated  a-^ 
large  volume  of  unnecessary  expense  in  postage,  cut- 
out the  duplication  of  effort,  in  member  books  and 
^helped  also  to  wipe  out  a  certain  class  of  exchange 
charges.  These  charges  had  outgrown  their  origmal 
function  of  covering  the  expense  of  handling  items  and 
had  become  purely  sources  of  profit. 

Suppose,  for  example,  that  eight  member  banks 
received  in  a  single  day  one  check  each  for  $10  drawn 
against  the  same  bank  in  a  Michigan  town.  Each  of 
these  eight  bankers  would  have  to  send  a  collection 
letter  to  this  particular  country  bank  and  it  in  turn 
would  have  to  reimburse  the  eight  banks  m  the  city. 
The  country  bank,  let  us  say,  might  impose  a  mimmum 
exchange  charge  of  10  cents  for  checks  up  to  $100. 
These  eight  $10  checks,  then,  although  their  total 
would  make  less  than  $100,  would  be  subject  to  a  total 
charge  of  80  cents.  A  clearing  house  for  country  items 
combines  the  work  in  such  a  way  that  these  excessive 
exchange  charges  are  removed  at  one  stroke.  At  the 
same  time  the  transfer  of  funds  is  made  with  less 
expense  and  effort. 

Reducing  exchange  charges  in  this  way  has  not 
always  met  with  favor  from  some  country  banks.  It 
has  been  agreed  that  it  curtails  a  certain  legitunate 

201 


\u 


w 


»>    ^' 


I       .5 


1 


l! 


M 


I    ^\ 


!« 


f 


202 


MAKING  COLLECTIONS  PAY 


revenue.  For  instance,  one  smaU  bank  had  upon  its 
books  318  commercial  accounts  with  an  averaee 
balance  of  $72,  or  $24,196  in  the  aggregate.  To  offset 
the  expense  of  carrying  these  small  balances,  it  de- 
pended on  the  exchange  item  as  a  source  of  profit 
This  is  probably  typical  of  banks  which  persist  in 
CMTymg  the  accounts  of  customers  who  do  not  main- 
tain balances  of  sufficient  size  to  repay  the  bank  for 
the  service  furnished.  This  condition,  probably  more 
than  any  other,  has  hastened  the  adoption  of  the 
serince  charge  and  other  methods  of  making  accounts 
profitable,  as  described  in  the  volume  of  this  series  on 
accountmg  and  costs.  With  the  losses  on  accounts 
covered  country  banks,  mvestigation  indicates,  see  the 
advisabihty  of  minimizing  exchange  charges  to  cus- 
tomers as  far  as  possible. 

Therefore,  the  plan  of  the  Detroit  country  clearing 
house  offers  many  suggestions  both  to  the  country  and 
to  the  city  banker  for  handling  exchanges  satisfactorily. 
Jiven  If  some  bankers  are  not  entirely  in  accord  with 
the  Ideas  set  forth,  they  may  see  ways  to  adopt  them 
profitably.  At  any  rate,  the  plan  has  helped  in  a  laree 
measure  to  cut  down  the  labor  and  expense  due  to 
the  constantly  growing  use  of  the  personal  check. 

Ihe  manager  of  this  clearmg  house  is  empowered  to 
make  afrangements  for  the  reciprocal  service  with  aU 
of  the  banks  m  the  territory.  He  acts  in  much  the 
s^e  way  that  he  would  were  he  the  officer  of  an 
mdiyidual  bank.  In  determining  to  what  bank  in  a  ' 
district  the  clearing  house  shaU  send  items  for  coUec- 
tions,  he  estunates  carefully  the  strength  of  the 
mstitution  and  the  service  it  is  able  to  offer.  To  advise 
country  baiJcers  of  the  plan,  he  sends  out  letters 
explaming  the  functions  of  the  clearing  houses  and 
foUows  this  up  with  a  card  (Figure  61)  requesting  from 
each  bank  the  names  of  its  correspondents,  its  officers, 
a  schedule  of  its  mcoming  and  outgoing  mails,  its 


Detroit  Glearia^  House  Association 
No.  90— COUNTRY  CHECK  DEPARTMENT— No.  99 


Detroit.  Nfich.,. 


Received  froitL. 


.cash  items  said  to  amount  to  $. 


This  DUE  BILL  PAYABLE  through  the  Clearing  House  at  the  regular 
exchange  of  clearings  "«•  when  remittance 

shall  have  been  received. 


Figure  60:    This  simple  due  bill  is  given  to  each  bank  depositing  items 
with  the  clearing  house,  and  is  taken  up  as  soon  as  the  items  are  cleared. 


M 
A 
1 
L 

Leave  Detroit 

Arrive 

Leave 

Arrive  Detroit 

Exchange 

President                               D«*^«'^  C^"*- 

Rate 

Date 

Vice-President 

Cashier 

Assistant  Cashier 

Capital 

Surplus 

Cash 

Loans 

Deposits 

I 


Figure  61 :  The  Detroit  Country  Clearing  House  sends  out  to  banks 
in  its  district  slips  like  these  which,  when  returned,  act  as  a  guide  in 
determining  what  banks  may  be  best  suited  to  handle  certain  business. 

203 


^ 


204 


MAKING  COLLECTIONS  PAY 


I 


Ill 


exchange  rate  for  charges  on  cash  items,  and  the  latest 
statement  of  its  condition.  When  these  cards  are 
returned,  they  are  alphabetically  filed.  Then  a  list 
of  all  the  banks  to  which  the  clearing  house  has 
arranged  to  send  items,  and  the  exchange  rate  charged 
by  each,  is  sent  to  all  the  banks  which  have  become 
members  of  the  clearing  house.  As  additions  or 
changes  are  made  in  the  list,  the  members  are  informed, 

HOW  THE  CLEARING  HOUSE  FACILITATES  THE 
ROUTINE  OF  HANDLING  ITEMS 

The  management  furnishes  to  each  bank  member  a 
stamp  to  indorse  its  items  to  the  clearing  house,  and 
for  the  clearing  house.  The  various  member  banks 
are  also  provided  with  record  sheets  and  foreign 
slips  to  facilitate  the  depositing  of  items  to  be  cleared. 
Each  foreign  slip  shows  at  the  top  the  clearing  house 
number  of  the  bank  indorsing  the  items,  the  date  of 
the  indorsement  and  the  name  of  the  bank  and  the 
town  to  which  the  items  are  to  be  sent.  This  informa- 
tion is  repeated  on  a  perforated  stub  and  the  amount 
of  each  item  is  entered  on  the  body  of  the  sHp  and  then 
a  total  is  made  and  carried  to  the  stub.  The  foreign 
slips  with  the  items  attached  are  sorted  into  alpha- 
betical order  and  a  list  of  the  totals  is  usually  made  on 
an  adding  machine.  Then  this  list  is  indorsed  by  the 
member  bank  making  the  deposit.  The  items  are 
wrapped  in  a  package  with  the  list  on  its  face  and 
delivered  to  the  clearing  house  by  messenger.  A  check 
or  due  bill  (Figure  60)  payable  through  the  clearing 
house  at  a  subsequent  date,  is  issued  to  the  member 
bank  for  the  amount  of  the  day's  total  deposit.  The 
date  these  checks  are  clearable  is  fixed  by  the  average 
time  required  to  get  the  returns  for  the  items  from  the 
districts  covered  by  the  country  clearing  house. 

When  each  day's  items  are  deUvered  at  the  clearing 
house  by  the  bank  messenger  the  stubs  are  detached 


CLEARING  COUNTRY  ITEMS 


205 


and  filed.  The  receipt  illustrated  in  Figure  60  is  then 
handed  to  the  bank  messenger.  An  adding  machine 
list  is  made  of  the  totals  shown  on  the  sHps  and  this 
is  proved  against  the  list  accompanying  the  items. 
The  amounts  of  the  items  are  then  distributed  on  a 
form  called  the  lot  sheet  (Figure  63),  after  which  the 
items  are  grouped  in  alphabetical  order  by  towns. 
Another  sorting  groups  the  checks  for  the  banks  in 
each  town.  Thus  when  all  the  deposits  are  made  and 
the  sorting  is  finished,  the  items  are  Usted  in  the 
country  clearing  house  letters  of  transmittal  (Figure 
62).  The  total  shown  on  the  slips  is  transferred  by 
adding  machines  to  these  letters  and  to  stubs,  which 
are  detached  and  filed  as  the  record  of  the  transit 
charges  against  the  country  banks. 

Each  day  a  total  is  taken  of  all  these  stubs.  If  the 
work  is  correctly  done,  this  total  will  prove  against  the 
total  of  all  deposits  made  with  the  clearing  house  for 
that  day.  These  totals  are  listed  on  a  form  like  that 
shown  in  Figure  65.  When  the  letters  are  paid,  the 
accounts  are  credited  by  removing  from  the  transit 
the  corresponding  stubs  and  drawing  an  order  (Figiure 
64)  in  favor  of  the  bank.  All  retiu-ns  are  made  direct 
to  the  manager  of  the  clearing  house.  Notification  of 
all  refused  and  protested  items  is  given  on  a  form  like 
that  shown  in  Figure  66.  The  fees  charged  on  protested 
items  are  deducted  and  returned  with  the  draft  to 
cover  the  balance  of  the  letter  originally  transmitted. 

In  handling  the  collection  charges  of  Michigan 
banks  on  checks  collected  for  Detroit  banks,  a  simple 
form  (Figure  67)  is  employed.  A  card  record  of  this 
kind  is  kept  for  each  country  bank  and  each  of  the 
numbers  across  the  top  designates  the  member  bank  of 
the  clearing  house  association.  The  exchange  charges 
listed  for  the  first  five  days  of  the  month  show  how  the 
consolidation  of  country  business  through  the  one 
office  saves  a  large  sum  every  year  for  the  member 


r 


i 


L; 


'   i 


DETROIT  CLEARING  HOUSE  ASSOCIATION 

DETROIT,  MICH. 

Dtar  Sfs. 

EnctoMd  I  b«(  to  hand  yvm  cheeks  m  liftMl  ^ciew.  for  tk*  MMuat  of  whkb  plenc  remit; 
bjr  rtturn  mat  by  draft  on  your  DttroM.  New  York  or  Chieaio  eorraapondcnt.  payable  to  the  order  of  the 
Manager  of  the  Detroit  Ciearint  Houie  Awociation.  Protatt  all  unpaid  iteoM  over  $10  untesa  other, 
wiae  iiutnicted  or  bearu>(  '  'No  Proteat "  symbol  Wire  non-payment  of  all  iteow  of  $500  or  over  to  Oa. 
tioit  Bank  mdoning  tiiem  to  the  Clearing  Houac. 

Yo«n  vary  tt%tf 

J    H.  LANGDON,  Aaaitunt  Manager 


Figure  62:    Here  is  an  example  of  conciseness  in  transmittal  letters. 
This  advice  goes  with  items  for  collection  to  correspondent  banks. 


LETTERS 


LETTERS 


DETROIT 


DrntOIT        NEW  YORK      EXCHANGE      EXCHANGE 


•OSCELLANEOUS 


CHICAGO 


BANK  DfFARTMENT  RECAPITULATION 


DETROIT  CLEARING  HOUSE   ASSOCIATION 


CREDIT 
MEMORANDUM 


COUNTRY  CHECK  DEFAKTMLNT 
WILL  PAY  TO  THE  ORDER  OF 


No. 

2012 


Date. 


Charge  this  memorandum  to   number  99 
through  regular  city  clearing. 


Total 


Manager 


Figure  64:    To  pay  its  members  for  items  collected  from  country 
banks,  the  clearing  house  uses  this  convenient  credit  memorandum. 


Total  oi 


Figure  63;  To  simplify  the  coimtry  clearing  house  routine,  all  items 
received  from  the  local  banks  are  distributed  on  a  lot  sheet  like  this 
which  enables  those  in  charge  of  this  routine  to  handle  at  all  quickly. 

206 


' 


Total  Bal. 


*i,ffntts^ 


TMml*\i*f.D2^^tj\j.f. 


2MQk 


r 


♦i 


Figure  65:  Here  is  an  interesting  sheet.  On  it  the  country  clearing 
house  lists  the  totals  of  all  items  sent  out  each  day  to  correspondent 
banks.   The  figures  should  prove  up  with  the  deposits  for  that  day. 

207 


Wi 


208 


MAKING  COLLECTIONS  PAY 


It!'' 


1 


4(1 


banks  in  the  city.  The  figures  here  shown  are  typical 
of  the  usual  run  of  busmess  from  month  to  month. 
Of  the  amounts  shown,  12  are  under  10  cents.  Each 
of  these  items  handled  separately  would  have  been 
subject  to  a  minimum  charge  of  10  cents— a  total  of 
$1.20.  By  clearing  them  through  the  coimtry  collec- 
tion department,  they  cost  only  55  cents. 

When  the  items  are  sorted  to  determine  the  exchange 
charges,  those  collectable  at  par  are  transcribed  to  a 
shnple  yellow  sheet,  those  at  5  cents  a  100  to  a  pink 
sheet,  and  those  at  10  cents  to  a  white  sheet.  The 
totals  are  then  listed  on  a  small  form  (Figure  68)  and 
sent  to  the  member  bank. 

Since  the  country  clearing  house  is  represented  as  a 
member  in  the  daily  exchange  at  the  regular  clearing 
house,  it  distributes  the  returns  and  secures  credit  for 
all  returned  items.  The  members  charge  the  country 
clearing  house  with  all  the  checks  or  due  bills  which 
have  been  issued  in  place  of  the  items  deposited  with 
the  department  for  collection.  Investigation  shows 
that  in  some  country  clearing  houses  the  estunated 
time  required  for  getting  the  returns  is  so  close  to  the 
actual  time  that  the  due  bills,  as  they  become  payable, 
abnost  offset  the  returns.  The  small  debit  and  credit 
balances  that  arise  on  account  of  there  not  being  an 
exact  offset,  are  carried  over,  by  the  bank  which  falls 
heir  to  them,  until  the  following  day.  Sometimes, 
however,  the  amount  due  each  member  is  figiu-ed  daily. 

In  determining  the  costs  of  operation,  all  expenses 
are  prorated  monthly  on  the  basis  of  the  total  business 
and  the  total  number  of  items  handled  through  the 
department  for  the  month.  The  exchange  charges, 
computed  as  already  described,  are  assessed  against 
the  members  at  the  close  of  the  month  and  each 
member  is  thus  charged  with  the  actual  cost  of  the 
items.  These  charges  are  taken  from  the  letters  as 
they  are  paid  and  are  figured  and  totaled  each  day. 


DETROIT  CLEARING  HOUSE  ASSOCIATION 

COUNTRY  CHECK  DEPARTMENT 


Item  attached  is  returned  for  reason  indicated  by  check  mark. 


L 


lamfBdcnt  f  ante 
Pott  dated 
laoompkte 
No  •coouflt 
Pajnocnt  stoppod 


Indonetnent  lacking 
Signature  lacking 
Signature  unsatitfactory 
ladonement  unMtisfactoty 
Reason  not  ^vcn 


Hot  drawn  on  a  bank 
Clearing  houae  does  not  |>aadl» 

Fordgn  item 


Figure  66:    By  stamping  the  date  in  the  blank  space  and  checking  the 
reason,  this  notice  advises  a  member  bank  why  an  item  is  returned. 


' 

1      7     9    10  15    17 

21    23    24    26   27          Total 

1           df           ^    '^ 

01 

z*> 

2                          l^                0^       Ob 

//            *? 

3             f3      ox     cH             12 

<^ 

A    a         at    to 

03 

5y 

5                                   i/ 

05                         0^ 

U 

6 

7 

8 

9 

10 

11                                           ~ 

__ 

J 

p^^'l  1  1'TtxttTT^ 

24 

25 

26 

27 

28 

29 

30 

31 

1      7     9    10   15    17 

21    23  24    26   27 

iz:                  — ' 

i 


Figxire67:  To  keep  tab  on  all  exchange  charges  of  coimtry  banks  for 
collecting  items  for  Detroit  banks,  the  coimtry  clearing  house  uses  this 
time-saving  record.     The  top  nxmibers  designate  the  member  banks. 

2C9 


ii 


!i 


I 


210 


MAKING  COLLECTIONS  PAY 


Thus,  the  country  clearing  house  does  not  interfere 
with  the  individual  arrangements  of  its  members  but 
provides  a  fair  and  equitable  plan  of  collection  which 
effects  a  great  saving  of  time  and  money.  Since  it 
reduces  exchange  charges,  speeds  up  the  returns,  and 
cuts  every  item  of  expense  incidental  to  the  handling 
of  out-of-town  checks,  it  performs  a  valuable  fimction 
in  an  increasingly  important  field. 

In  Michigan,  for  example,  where  there  are  more  than 
500  towns  and  cities  in  which  banks  have  been  estab- 
lished the  savings  on  postage  alone  is  between  $10  and 
S12  a  day.  Added  to  this  is  a  corresponding  saving  of 
labor  in  handling  the  returns.  The  same  economy  is 
effected  in  tracing  and  in  correspondence. 

THIS  PLAN  REDUCES  THE  EXPENSE  ONE  HALF  AND  AT 
THE  SAME  TIME  GETS  BETTER  RESULTS 

Viewed  from  the  standpoint  of  the  coimtry  banker, 
this  plan  relieves  him  of  considerable  work.  Instead 
of  having  to  prepare  a  mmiber  of  drafts,  he  makes  out 
only  one.  Similarly,  one  envelop  is  sufficient,  thus 
resulting  in  a  saving  of  postage  and  stationery.  One 
country  clearing  house,  for  instance,  which  has  handled 
items  of  nearly  6,000  banks,  has  saved  60%  on  the 
general  gross  expense  involved.  Fm-thermore,  the 
time  for  getting  returns  has  been  sharply  reduced. 
This  concretely  illustrates  the  advantage  of  the  plan 
from  all  angles. 

In  organizing  a  clearing  house,  each  bank  which 
elects  to  become  a  member  is  given  a  number  under 
which  its  business  is  transacted.  By  using  this  number 
instead  of  the  name,  which  frequently  consists  of  two 
words  or  more,  a  great  deal  of  the  time  is  saved. 

Each  member  mamtains  a  clearing  house  depart- 
ment, usually  in  connection  with  the  transit  depart- 
ment, and  all  items  drawn  or  payable  at  the  other 
member  banks  are  charged  against  it.    The  items,  as 


CLEARING  COUNTRY  ITEMS 


211 


a  rule,  are  first  recorded  in  the  department  where  they 
originate.    When  they  reach  the  clearing  house,  they 
are  examined  for  the  date,  the  signature,  and  so  on. 
Then  they  are  indorsed  with  a  rubber  stamp  which 
shows  the  clearmg  house  number  of  the  clearing  bank 
and  the  date  of  the  clearing.  The  next  step  is  to  sort 
and  place  in  a  separate  pile  all  the  items  drawn  on  or 
payable  at  the  member  banks.    When  the  sorting  is 
finished,  each  pile  of  checks  is  listed,  and  following  the 
process  in  the  country  collection  department  as  aheady 
outlined,  the  items  are  placed  in  packages,  the  list 
covering  each  package  is  attached  to  the  face,  and 
they  are  sent  to  the  clearing  house.    Each  package 
list  is  there  indorsed  with  the  regular  clearing  house 
indorsement  stamp. 

The  clearing  house  provides  statement  forms  (Figure 
69)  which  show  the  name  and  the  number  of  the  bank. 
The  total  entered  on  each  package  of  items  is  listed 
in  the  proper  columns  opposite  the  name  and  the 
number  of  the  bank  in  which  the  items  are  to  be 
cleared.  Then  the  statement  is  footed,  and  if  all  the 
totals  prove  to  be  correct,  the  packages  are  rushed  by 
messenger  to  the  clearing  house,  because  deUvery  must 
be  made  at  a  definitely  fixed  time. 

The  exchange  room  at  the  clearing  house  is  equipped 
with  a  cage  or  a  desk  for  each  member,  at  the  head 
of  which  the  manager  or  one  of  his  assistants  sits. 
After  the  messengers  reach  their  respective  cages  they 
pass  around  their  various  packages  of  items,  package 
niunber  1  going  to  cage  niunber  1,  package  number 
7  going  to  cage  nimiber  7,  and  so  on.  When  the 
deposits  are  thus  made,  each  messenger  has  before 
him  on  his  desk  a  package  of  items  from  each  member. 
He  notes  on  his  statement  in  a  column  headed 
"from  clearing  house'*  and  opposite  the  names  and 
numbers  of  the  members,  the  amoimt  indicated  on 
the  package  received  from  each.     These  packages 


I 


I    ■ 


'iv. ' 


DETROIT  CLEARING  HOUSE  ASSOCIATION 

COUNTRY  CHECK  DEPARTMENT 

You  are  charged  exchange  as  below  on  your  deposit  of 


Rate 

Amount  deposited 

Exchange  | 

Par 

10c 

5c 

Total 

To___ 

Mana^er^ 


Figure  68:    A  form  Uke  this  for  each  member  bank  is  filled  out  daily 
by  one  clearing  house  to  show  the  exchange  charged  on  foreign  items. 


i-igure  69:  The  clearing  house  furnishes  each  member  bank  statement 
forms  like  the  above  on  which  the  clearing  department  lists  its  items 
on  other  banks.    This  standardizes  as  well  as  speeds  up  the  routine. 

212 


DETROIT  CLEARING  HOUSE  ASSOCIATION 
COUNTRY  CHECK  DEPARTMENT 

RANK  Nf\ 

PINECRED 

■ 

RANK  NO 

rr 

1 

You  are  ch«rgcd  for  fine*: 

: 

1 

ftit^  in  tirpnfting  'n't*  d^T^*^ 

• 

Total  DcpOMt 

Stub  or  Letter 

• 

j   LiMing 

p^                                                                TOTAL 

TOTAL 

m^^^^^mm. 

nM» 

Manager 

• 

Figure  70:    In  this  simple  way  member  banks  are  fined  for  the  de- 
linquencies  noted.     The   stub   is  a   record   for  th:  clearing  house. 


Hm 


NO. 


DETROIT  CLEARING  HOUSE  ASSOCIATION 

cm  ftEAMMC        ^'■y  ^-^— 


.1»1jL_ 


OEnn 


jm 


CREDITt 


IIIIMII 


CMGCKS  Dt. 


T-l—T 


BAUNCO  PL  NO 


rrm 


BAUNCn  CR. 


HCE 


CHECKS  OR. 


I     I     I 


Fbw 


NO 


niST  AND  OLD 
BETMIT  NATIONAl 


10 


» 


L  NARPEI  AND 
IC8MPANY 


17 


n 


23 


U 


» 


DETROIT  CLEARING  HOUSE  ASSOCIATION 


■ETUINED  ITEM  CLEAMNfi. 


.ml 


fmx  STATE 


DETMNT  UVINSt 


POrLD  STATE 


PENINSUUR  STATE 


MME  UVIN8S 


WAYNE  COUNTY 
AND  NOME  UVIN6S 


NATIONAL   SANK 
•F  COMMEKE 


M  CENTIAL  UVIN6S 


MEKNANn 
NATIONAL 


U  AMEMAN  n«TC 


COUNTY  aEAIIIW 
DEPARTMENT 


TOTAL 


DEBITS 


II 


CREDITS 


iWiUL 


[iinii 


Ul't 


mi 


i\ 


\\i\i 


u 


lili^lL 


li 


llllm 


2ittt 


Mittc 


4SD( 


^ 


CHECKS  DR. 


BAUNCESDR. 


ZinLC 


i]3eL 


lUA 


\nii 


^h 


l\iii 


u 


imn 


NO. 


10 


IS 


17 


21 


23 


24 


S7 


BAUNCES  CR. 


s: 


US{ 


il^ 


(^2!Ln 


IIM 


mm 


mi 


inn 


\iin 


i\ 


CHECKS  C& 


Figure  71:  The  totals  of  all  the  statements  from  member  banks 
(Figure  69)  are  entered  on  the  above  sheets,  which  show  on  one  side  the 
city   clearings   and   on  the  other  all  of  the  returned  item  clearings. 

213 


'  If 


li 


I- 


!" 


I 


Ua 


214 


MAKING  COLLECTIONS  PAY 


are  then  rushed  back  to  the  bank  and  distributed  to 
the  accounting  department  for  verification,  and  so  on. 
A  dupUcate  of  each  statement  is  retained  by  the 
manager  of  the  clearing  house,  who  enters  in  his 
records  the  net  debit  and  credit  balances  of  the 
various  members  (Figure  71). 

In  settling  the  balances,  the  clearing  house  manager 
usually  draws  checks  against  the  debtor  banks  in 
favor  of  the  creditor  banks.  These  checks  are  payable 
in  cash  and  settlement  must  be  made  before  the  close 
of  the  day. 

Owing  to  the  speed  with  which  the  clearings  must 
be  handled,  there  is  often  a  temptation  to  slight  the 
work.  It  is  essential  therefore  to  guard  against 
mistakes.  Furthermore,  the  clearings  cannot  be 
delayed,  on  account  of  the  heavy  cost  involved.  In 
order  to  encourage  prompt  delivery  of  the  items  at 
the  appointed  hour  and  to  insure  accuracy  on  the 
part  of  the  clerks,  fines  are  imposed  for  wrong  clearings, 
absence  of  indorsements,  and  similar  errors.  These 
fines  cover  a  wide  range.  In  the  clearing  house',  for 
example,  a  member  bank's  tardiness  or  delay  through 
error  is  fined  $1  for  the  first  15  minutes,  and  this 
assessment  is  doubled  for  every  following  15  minutes, 
thus:  $2  for  30  minutes,  $4  for  45  minutes,  and  so  on. 
The  fines  are  then  charged  to  the  offending  member 
bank's  account  on  a  special  form  (Figure  70).  The 
stub  is  retained  at  the  clearing  house  as  a  record. 

Thus  the  clearing  house  exerts  a  strong  influence  on 
the  regulation  of  exchange  and  collection  charges  and 
is  an  effective  instnmient  in  taking  care  of  the  common 
interests  of  all  the  banks  in  a  conamunity.  Each  bank 
becomes  a  part  of  a  united  structure  which  strengthens 
the  credit  facilities  of  all. 


/ 


CHAPTER  XVI 


HANDLING  COLLECTIONS  AT  A  PROFIT 


A  COUNTRY  bank  in  the  Middle  West  has 
worked  out  a  simple  and  definite  method  for 
handling  collections,  which  has  stopped  a  num- 
ber of  leaks  and  netted  a  constant,  worth-while  profit. 
More  than  that,  it  has  removed  the  cause  of  much 
annoyance  to  customers  who  considered  the  old  ways 
of  charging  fees  for  collections  unreasonable. 

Within  a  month  after  installing  the  new  system, 
the  bank  reduced  by  20%  the  losses  on  unpaid  collec- 
tions. During  the  60  days  following  that  first  period, 
the  percentage  of  losses  gradually  was  cut  48%.  In 
other  words,  the  number  of  collections  on  which 
fees  were  paid  increased  rapidly  until  at  the  end  of 
three  months  nearly  one  half  of  the  items  formerly 
returned  by  this  bank  uncollected  produced  an  income 
where  a  loss  existed  before. 

The  plan,  which  will  be  described  in  this  chapter, 
helped  to  reduce  labor  by  more  than  one  half  and  it 
also  simplified  the  accounting  system.  By  lessening 
the  misunderstandings  that  usually  cropped  out  imder 
the  old-fashioned  system,  it  naturally  contributed  to 
a  more  effective  service  policy  and  greater  good  will. 
Furthermore,  the  retiu-ned  items  were  made  to  stand 
a  proportionate  share  of  the  cost  of  handling. 

In  many  banks,  especially  the  country  banks,  the 
collection  department  often  represents  a  source  of  loss, 
yet  the  service  cannot  be  eliminated  without  possibly 
working  a  hardship  on  customers.    Moreover,  collec- 

215 


I 


f 


^fl 


I 


I 


ii  i  i 


! 


f  {!; 


21G 


r.IAXING  COLLECTIONS  PAY 


tions  are  sure  to  be  sent  to  the  bank  whether  it  wants 
them  or  not,  and  it  is  therefore  essential  for  every 
bank  to  adopt  methods  which  will  make  the  collections 
a  source  of  revenue  and  a  means  of  creating  improved 
service.  It  is  probably  true  that  in  the  great  majority 
of  cases  the  item  to  be  collected  is  not  accompanied 
by  postage  for  its  return  in  case  of  non-payment.  Thus, 
the  banker  who  desires  to  operate  this  branch  of  the 
busmess  at  a  profit  should  have  a  definite  plan. 

The  system  under  consideration  was  decided  upon 
after  the  oflScers  of  the  bank  had  watched  and  checked 
collections  carefully  for  a  period  of  60  days.  Dis- 
satisfied with  the  showing,  they  analyzed  the  problem 
thoroughly  and  then  hit  on  the  shnple  plan  which  makes 
use  of  the  three  forms  shown  in  Figures  72,  73,  and  74. 
The  first  is  the  remittance  form,  which  is  printed  on 
white  paper.  The  stub  is  for  the  ''returned  unpaid'' 
notice  and  is  detached  at  the  perforated  line.  The 
register,  which  is  shown  in  Figure  73  is  printed  on 
onion  skin  tissue  and  serves  as  a  permanent  record  of 
the  collection,  while  the  notice  to  the  payer  (Figure  74) 
is  pink  and  includes  a  stub  for  the  payer's  instructions 
to  the  bank. 

When  a  collection  is  received,  the  clerk  makes  out 
the  details  on  Figure  72,  and  these  facts  are  auto- 
matically transferred  at  the  same  tune  to  the  other 
forms  by  means  of  carbon  paper.  The  notice  to  the 
payer  has  been  found  ahnost  as  effective  as  a  personal 
call  for  payment.  Besides,  its  make-up  and  wording 
has  successfully  prevented  antagonizing  a  customer. 
Notice  that  the  stub,  which  he  is  asked  to  return  to 
the  bank,  provides  in  advance  for  a  definite  answer. 
He  has  only  to  check  one  of  the  squares  giving  alter- 
native instructions,  and  sign  his  name.  This,  of 
course,  is  far  more  agreeable  both  to  hun  and 'the 
bank,  than  the  old  indefinite  way  of  leaving  it  up  to 
the  customer  to  'Hhmk  up''  some  answer. 


THE  FIRST  NATIONAL  BANK 

OF  TAYLORVILLE,  ILLINOIS 


i 


DATE  OF 

THBIR  LETTK»  DATE  RECEIVED  OUR  NO. 


KINDLY  RETURN  THIS  SUP 
TO  BANK  WITH  RCMITTANCC 
RCQUCSTCD  ■CLOW 

RETURNED 
UNPAID 


RECEIVED 
FROM 


PAYEE 


PAYER 


YOUR  NO  FORM  B'L  INT.  DATED  DUE 


PRO. 


YES 
NO 


MEMO.       AMOUNT 


INSTRUCTIONS: 


INTEREST 

TOTAL 

LES  DEDUCTION  FOR 


LESS  EXCHANGE 

WE  CREDIT  YOUR 

ACCOUNT 

WE  ENCLOSE 

DRAFT  ON FOR 


DATE  PAID 


DATE 


OUR  NO. 


REASON  RETURNED 


PLEASE  REMIT 

^  TO  COVER 

OUR  EXPENSE 
IN  HANDLING 
THIS  ITEM 

THE  FIRST  NATIONAL  BANK 
TAYLORVILLE,  ILLINOIS 


Figiire  72:  This  form  in  triplicate  has  greatly  reduced  one  bank's 
expense  losses  on  returned  collection  items.  The  stub  at  the  right 
when  filled  in  with  the  proper  amoimt,  has  brought  worth-while  returns. 


y 


THE  FIRST  NATIONAL  BANK 

OF  TAYLORVILLE,  ILLINOIS 


RETURNED 
UNPAID 


DATE  OF 
THEIR  LETTER 

DATE 
RECEIVED 

OUR 

NUMBER 

OUR 
DATE              NUMBER 

RECEIVED 
FROM 

YOUR 
NUMBER 

FORM 

B/L 

INT. 

DATED 

DUE 

REASON  RETURNED          1 

% 

PAYEE 

PRO. 

MEMO. 

AMOUNT 

YES 
NO 

PAYER 

INTEREST 

TOTAL 
LESS  DEDUCTION 

THE 

FIRST  NATIONAL  BANK 

TAYLORVILLE.  ILLINOIS 

INSTRUCTIONS: 

FOR_ 

LESS  EXCHANGE 

WE  CREDIT  YOUR 

ACCOUNT 

WE  ENCLOSE 

DRAFT  ON                    FOR 

DATE  PAID 

Figure  73:  The  second  sheet  of  the  collection  form  shown  in  Figure 
72  is  reproduced  here.  It  acts  as  the  permanent  record  or  register 
of  the  item,  and  gives  all  data  about  the  disposal  of  the  collection. 

217 


i! 


f 


iij^^ 


■4    i 

I 


218 


MAKING  COLLECTIONS  PAY 


As  soon  as  a  payer  returns  the  slip  the  bank  knows 
exactly  the  procedure  to  take,  for  the  instructions 
show  whether  it  is  to  pay  the  item  and  charge  the 
amount  against  his  account;  to  hold  the  collection  a 
reasonable  length  of  time  until  he  can  pay;  or  to 
retiuTi  the  draft  unpaid,  with  the  reason  attached. 
The  remittance  form,  of  course,  remains  in  the  file 
until  the  item  is  either  paid  or  returned.  This  acts  as 
a  tickler  for  the  bank  against  allowing  a  collection 
to  remain  out  too  long. 

A  TESTED  METHOD  THAT  MAY  WORK  EQUALLY  WELL 

IN  YOUR  BANK 

When  an  item  is  paid,  the  exchange  and  other  de- 
ductions are  entered  on  the  remittance  sheet  and 
transferred  to  the  permanent  record  or  register  sheet 
by  means  of  a  carbon.  Then  the  remittance  form, 
after  the  *' returned  unpaid'*  slip  has  been  detached,  is 
dispatched  with  the  remittance  to  the  drawer  or 
maker  of  the  item,  and  affords  a  complete  record  of 
the  collection  for  his  information. 

If  the  item  is  returned  unpaid,  however,  the  reason 
is  entered  on  the  ''returned  unpaid"  stub,  of  which 
also  a  permanent  record  is  automatically  made  by 
carbon  on  the  register. 

This  little  "retm-ned  unpaid'*  slip  is  really  the 
unusually  effective  magnet  that  has  brought  back  to 
the  bank,  to  cover  its  labor  and  expense  in  trying  to 
collect  an  item,  many  a  fee  which  would  otherwise 
have  been  lost.    The  pulling  power  of  the  stub  is  due 

to  these  pointed  words,  in  red:  ** Please  remit cents 

to  cover  our  expense  in  handling  this  item.'*  In  the 
blank  space,  10,  15,  or  20  is  inserted,  depending  on 
the  time  and  effort  expended.  Thus,  profitable  results 
Were  obtained  as  outlined  at  the  beginning  of  the 
chapter.  In  order  to  make  the  return  of  the  fee  as 
easy  as  possible,  the  bank  also  enclosed  a  self -addressed 


METHODS  THAT  INSURE  PROFITS 


219 


(not  stamped)  return  envelop.  A  test  showed  this  to 
be  worth  while  to  get  the  money  in.  The  officers  of 
this  bank  consider  the  collection  of  fees  on  48%,  or 
nearly  half  of  the  items  returned,  a  very  desirable  record. 
To  summarize  the  results  of  this  one  plan,  let  us 
compare  the  losses  under  the  old  method  used  with 
the  profits  under  the  new: 

LOSSES  BY  OLD  METHODS 

a.  70%  of  the  collections  returned  unpaid,  representing  a  loss 
in  time  due  (1)  to  making  out  separate  forms  for  every  transaction, 
when  entered,  when  paid,  or  when  returned;  (2)  to  presenting 
items  person^y  and  making  out  the  payer's  instructions. 

b.  Postage  paid  on  60%  of  items  returned  unpaid  to  makers. 

c.  Ill  feeling  against  the  bank,  caused  by  personal  collection 
methods,  sometimes  resulting  in  the  actual  loss  of  accounts. 

PROFITS  UNDER  NEW  METHODS 

a.  Exchange  equal  to  an  average  of  20  cents  earned  on  each 
item  paid.    One  third  of  all  items  presented  are  paid. 

b.  A  similar  amount  of  exchange  earned  on  nearly  50%  of  all 
items  returned  unpaid. 

c.  A  friendly  means  established  to  find  out  how  tradespeople 
are  meeting  their  obligations — a  valuable  help  to  the  bank  which 
does  not  arouse  its  customers'  displeasure. 

And  this  is  only  one  of  many  plans  that  have  been 
worked  out  to  handle  collections  profitably.  For,  as 
every  bank  knows,  the  collection  department,  although 
at  times  somewhat  of  a  problem,  is  one  of  his  most 
important  activities.  In  the  course  of  a  year,  banks, 
both  large  and  small,  handle  bonds,  coupons,  notes, 
and  mortgages;  drafts  of  various  kinds;  certificates  of 
deposit,  checks  and  bank  drafts;  insurance  claims  and 
vouchers;  and  many  other  similar  instruments  of 
value.  Checks  are  payable  when  presented;  time 
items,  when  due,  as  indicated  by  the  maturity.  Sight 
drafts,  when  accepted,  are  payable  on  demand. 

The  items  under  this  activity,  then,  which  the  bank 
handles,  may  be  classified  as  collection  items  and  cash 


^1 

11 


ii 


f 


J! 


I  ^ 


li 


220 


MAKING  COLLECTIONS  PAY 


items.  A  city  collection  often  is  presented  by  messenger 
and  a  foreign  collection,  of  course,  goes  through  the 
mails.  These  items  may  be  further  classified  as  cash 
items  which  are  payable  on  presentation,  and  time 
items.  Cash  items  include  drafts,  notes,  and  other 
papers  payable  at  sight.  Time  items  cover  those 
payable  at  a  definite  time  and  are  usually  sent  to  the 
payer  in  advance  of  the  date  they  are  to  be  paid.  By 
advising  customers  of  this  distinction,  time  is  often 
saved  in  sorting. 

The  work  of  handling  collections,  to  be  done  prop- 
erly, requires  close  supervision.  To  begin  with,  the 
teller  on  coming  to  his  desk  in  the  morning  checks  up 
the  items  and  withdraws  from  his  portfoUo  all  the  city 
collections  matiuring  that  day.  Some  of  them  are 
probably  payable  through  the  clearing  house  as  out- 
lined in  Chapter  XV.  These  are  charged  and  dehvered 
to  the  note  teller  after  previously  prepared  letters  of 
advice  and  credit  tickets  have  been  attached.  These 
he  retains  until  some  disposition  is  made  of  them 
before  the  settlement  hour.  This  hour  is  usually  2 :30 
p.  m.,  excepting  Saturday,  when  it  falls  earlier. 

The  collection  teller  in  the  interim  holds  the  records 
describing  the  items  delivered  and  receives  a  report  on 
them  later  in  the  day. 

Early  in  the  morning,  between  7  and  8  o^clock  in 
many  banks,  the  department  receives  its  quota  of 
items  from  the  morning  mail,  and  the  task  of  separating 
unpaid  and  "live"  items  is  begun.  The  head  of  the 
department  checks  off  from  the  letters  received  the 
collections  that  are  listed,  segregating  the  returned 
"impaids'*  and  noting  the  reason  for  refusal  (if  stated) 
on  each  item,  and  also  canceling  the  bank^s  indorse- 
ment. Then  the  new  city  sight  and  time  items,  as 
well  as  those  payable  out  of  town,  are  given  attention 
and  marked  according  to  their  classification.  They  are 
now  ready  to  be  recorded. 


THE  FIRST  NATIONAL  BANK 

OP  TAYLORVILLE.  ILLINOIS 


DATE  or 
THEIR  LETTER 


DATE  RECEIVED 


OUR  NO. 


RECEIVED 
FROM 


PAYEE 


PAYER 


INSTRUCTIONS 


E 


YOUR  NO 


FORMB'L 


INT. 


DATED 


% 


PRO 


YES 

NO 


MEMO 


DUE 


AMOUNT 


THE  PAYER  IS  HEREBY  RESPECT- 
FULLY NOTIFIED  THAT  THE 
ABOVE  LISTED  ITEM  HAS  BEEN 
SENT  TO  THIS  BANK  FOR  COL- 
LECTION. 

KINDLY  ADVISE  US  AS  SOON 
AS  POSSIBLE  WHETHER  OR  NOT 
YOU  DESIRE  TO  PAY  SAME,  GIV- 
ING REASONS  IF  YOU  WISH  IT 
RETURNED  UNPAID. 
IF  YOU  CAN  NOT  COME  TO  THE 
BANK  KINDLY  RETURN  THE 
SLIP  ATTACHED. 

THE  FIRST  NATIONAL  BANK 


KINDLY  SIGN  AND  RETURN 
THIS  SLIP  TO 

THE  FIRST  NATIONAL  BANK 

TAYLORVILLE.  ILLINOIS 

AS  SOON   AS  POSSIBLE.  CHECKING 

IN  SQUARE  PROVIDED,  DISPOSITION 

OF  ITEM 


DATE 


NO 


D 
D 


D 


KINDLY  PAY  ITEM  AND  CHARGE 
AMOUNT  TO  MY  ACCOUNT 

KINDLY  HOLD  ITEM I  WILL 

CALL  AT   YOUR  BANK  IN 

DAYS    AND  PAY  SAME 

KINDLY  RETURN  ITEM  UNPAID. 
FOR  REASONS  GIVEN  BELOW 


SIGN 
HERE 


Figure  74:  An  important  feature  of  this  collection  plan  is  the  third 
copy  which  goes  to  the  payer.  The  stub  is  arranged  so  that  the  payer 
may  easily  indicate  just  what  disposition  he  wishes  made  of  the  item. 


FORQGN  COLLECTION  REGISTER 

DATE 

TO  WHOM  SENT 

RESIOENCE 

1          PAYER          1 

NATIONAL  BANK  OF  COMMERCE  IN  ST.  LOUIS 

OWNER             '      AMOUNT    | 

MATURITY 

NO. 

00 

01 

02 

03 

I 

04 

05 

06 

07 

— 1 

'"1 

. 

08 
1 

oX 1 

1 —  — 

|— — -===^ ^'  V  111 



44 

J« 1 « 

4S 

46 

47 

4« 

49 

' 

Figure  75:  For  collections  involving  collateral  of  bonds,  stocks,  and 
other  bulky  papers,  one  bank  keeps  this  record  in  a  looseleaf  binder . 
The  last  column  provides  for  special  notations  of  the  terms  and  security. 

^  221 


222 


MAKING  COLLECTIONS  PAY 


^'^'  if' 


The  letters  from  which  the  collections  have  been 
checked  go  next  to  the  advice  clerk  to  be  acknowledged. 
The  registering  of  the  city  sight  items,  the  time  items 
then  due,  and  the  drafts  for  acceptance,  always  pre- 
cedes the  recording  of  out-of-town  items.  In  this 
way  there  is  the  least  possible  delay  in  disposing  of 
the  local  collections. 

Drafts  and  acceptances  drawn  on  firms  and  indi- 
viduals, also  time  paper  due,  and  those  items  payable 
within  a  reasonable  period,  are  placed  in  the  teller's 
basket.  To  facilitate  the  work  in  one  bank,  each  piece 
of  paper  has  the  customary  payer's  notice  attached. 
All  these  items  are  then  turned  over  to  the  head  mes- 
senger, who  distributes  them  to  his  helpers.  If  the 
bank  is  small,  one  messenger  may  do  all  the  work, 
even  to  the  outside  calls.  If  there  is  more  than  one 
messenger,  each  works  a  definite  route.  In  present- 
ing items,  the  messengers  usually  leave  a  memo- 
randum in  the  event  the  payer  is  not  at  his  desk.  How 
the  work  of  the  messenger  facilitates  the  routine  is 
outlined  in  the  next  chapter. 

Letters  containing  drafts  in  payment  of  items  are 
first  given  to  the  general  bookkeeper  and  are  checked 
by  him  and  his  assistant.  Then  the  letters,  with 
proper  notations  on  them,  go  to  the  collection  teller 
who  checks  the  letters  and  makes  the  corresponding 
change  in  his  records.  This  must  be  done  very  care- 
fully and  the  old-fashioned,  bound  collection  register, 
not  calculated  to  keep  pace  with  these  strenuous 
requirements,  has  been  generally  discarded.  A  card 
system  has  taken  its  place  in  many  banks.  Advices 
of  credit  received  from  out-of-town  correspondents 
are  checked  in  the  same  manner.  After  this  both  the 
debit  and  the  credit  tickets  i  are  assorted  in  divisions 
conforming  to  the  accounts  in  the  bank's  ledgers.  To 
balance  the  cross-entry  book,  the  amounts  of  drafts 
received  in  payment  of  items  are  listed  separately 


METHODS  THAT  INSURE  PROFITS         223 

from  the  letters  and  the  charge  tickets  on  the  debit 
side.  These  totals  agree  with  the  aggregate  amounts 
of  listed  credits  on  the  opposite  page.  The  teller's 
total  of  listed  payments  is  proved  on  a  proof  sheet 
which  is  written  up  from  the  items.  There  is,  there- 
fore, Uttle  opportunity  to  break  a  balance. 

Advices  of  credit  for  city  customers  are  temporarily 
filed  in  a  portfolio  alphabetically  indexed.  When  a 
customer  presents  his  pass  book,  these  advice  tickets 
are  withdrawn  and  entries  are  made  from  them, 
without  reference  to  the  bookkeeper's  ledger.  The 
advices,  as  well  as  all  unpaid  items  are  dehvered  to  the 
depositor  at  this  time. 

In  one  bank,  collections  of  a  bulky  natiu-e — those 
accompanied  by  bonds,  stocks,  mortgages,  and  other 
documents — are  entered  in  a  special  book  kept  for  the 
purpose  (Figure  75). 

A  SIMPLE  CARD  RECORD  THAT  HELPS  TO  ELIMINATE 
ERRORS— THERE  ARE  OTHER  ADVANTAGES,  ALSO 

When  the  assistant  teller  has  completed  the  regis- 
tration of  the  mail  items  and  has  passed  records  and 
letters  to  his  associates  for  checking,  he  is  reasonably 
sure  that  all  instructions  have  been  noted  and  followed 
out.  By  having  a  card  record  for  out-of-town  banks, 
giving  their  terms  for  handling  cash  and  collection 
items,  the  teller  finds  it  an  easy  task  to  prepare  each 
collection  without  making  any  errors.  Thus,  he  knows 
that  each  item  is  consigned  to  an  accredited  bank  or 
agency,  which  means  that  the  transaction  will  be  taken 
care  of  promptly  or  returned  (Figure  76). 

Collections  received  from  city  customers  throughout 
the  day  are  subject  to  the  same  careful  recording  and 
handling.  Telegrams  often  help  to  get  quick  action  on 
collections.  The  results,  of  course,  are  dependent  on 
conditions  and  on  the  amounts  involved.  Sometimes  a 
wire  is  advisable  if  paper  subject  to  protest  remains 


Ill 


ft 


1 


ilifl' 


Capital  and  Surplus.  $3,000,000 

THE  NATIONAL  BANK 

OF  THE 

REPUBLIC 

CHICAGO 


ENCLOSED  PLEASE  HNO  THE  FOLLOWING  DESCRIBEO 
ITEMS  FOR  COLLECTION  AND  RETURNS. 


Baublithcd  1891 


WiUum  T  Fmtotk  .     I«  Viw  I^iii«im 

Robert  M.  McKuinrx  ***  ViwrmnkM 

Oicar  H.  Swan,.  ...  -Tutiig 

Wra.  B  Lavinia, 

Thot.  D.  Atluv  .  _ 

l.(m»  J.  Mcahl. 

Wm.  C  fntmrnk  .    riiTu-  Ca 


SufTtndcf  documents  attached  on  payment  only . 

Wire  non-paymcni  of  itemi  JSOO  o«  over. 

Frotttt  all  itemi  over  $10  unlcn  marked  with  this  Mann,  or  a 

amtlar  authority  of  a  preceding  indoracr:  . 

Pleaae  RETURN  THIS  LETTER  with  your  remilfaac*.  or  report  hy  DATE 


N.P. 
2-13 


PAVER 


INSTRUCTION 


AMOUNT 


mOORSIK 


Zl 


Figure  76:  Here  is  a  satisfactory  collection  letter  form  for  items 
sent  out  of  town.  Note  the  small  star  which  serves  as  a  key  to  enable 
the  typist  to  write  the  address  so  that  it  will  fit  a  window  envelop. 


COLLECTION  DEPARTMENT 


NO  PROTEST 


No.  38488 


THE  NATIONAL  BANK  OF  THE  REPUBLIC 

CHICAGO 

CREDIT 


L 


Their  Letter 
Their  Number 

OUR  No.  38488 


Figure  78:  Here  is  the  second  sheet  of  the  collection  record  shown 
in  Figure  77.  At  the  top  is  provided  a  copy  of  the  transmittal  letter 
for  filing,  and  at  the  bottom  a  credit  slip  for  the  bookkeeper's  record. 

224 


NO.  2018 

THE  NATIONAL  BANK  OF  THE  REPUBLIC 

Chicago 

THE  COLLECTION  DEPARTMENT  encloses  herein 
for  COLLECTION  the  following  described  Items,  not  to  be  credited  until 
paM.  If  drawn  with  exchange  it  must  be  remitted  for  at  par.  Please 
acknowledge  or  advise  payment  by  number. 


NO  PROTEST  M//f^ 


OSCAR  H.  SWAN,  Cashier 


^//// 


<s^eJ^. 


Surrender,  documents  attached  on  payment  only 


5 

bJ 

o 

O 
111 

o 

> 

< 


THE  NATIONAL  BANK  OF  THE  REPUBLIC 

Chicago 


il 


Their  letter     t/^7 
Their  Number    ^  '   ^  f 


¥^' 


nuor     -     •      •    •  ^ 

OUR  NUMBER  2018 


CUy%JL^ 


Figure  77:  Collection  routine  in  one  bank  has  been  greatly  reduced 
by  the  use  of  the  above  advice  and  collection  register.  This  original 
sheet  combines  the  advice  of  credit  on  the  item  received  and  the 
letter  of  transmittal.    On  pages  2  24  and  2  2  7  are  shown  the  other  copies. 

225 


I 


f 


m 


m 


ill  I 


Cr. 


226 


MAKING  COLLECTIONS  PAY 


unpaid  or  unaccepted  at  the  close  of  the  day.  "No 
protest  items''  are  generally  held  for  three  days,  and 
if  unpaid  or  unaccepted  at  that  time,  are  returned. 

Time  paper  received  during  the  day  is  promptly 
examined  by  the  teller  who  checks  maturities  and 
other  items.  His  associate  meanwhile  sends  out  the 
customary  notices,  which  winds  up  the  day's  business. 

To  minimize  collection  routine,  one  bank  uses  a 
combined  advice  and  collection  register,  numbered  in 
tripUcate  (Figures  77,  78,  and  79).  The  sheets  are 
tabbed  like  letterheads  in  sets  of  50,  the  upper  or 
first  sheet  in  each  case  comprising  a  letter  of  trans- 
mittal together  with  an  advice  and  debit  ticket.  On 
the  second  form  is  printed  a  copy  of  this  letter  and  a 
credit  ticket.  The  third  sheet  is  of  cardboard  and, 
when  the  form  has  been  written,  shows  the  date  of  the 
letter,  to  whom  it  is  sent,  where  the  collection  is  pay- 
able, by  whom  it  is  drawn,  the  payer,  the  indorser, 
whether  it  is  payable  at  sight  or  on  demand,  when  it 
is  due,  the  owner's  number,  the  amount,  and  whether 
or  not  it  is  subject  to  protest. 

Thus,  in  this  bank  the  collection  department  writes, 
in  one  operation,  the  collection  letter,  together  with 
the  advice,  the  credit  and  the  debit  tickets.  At  the 
same  time  it  gains  for  its  records  in  the  third  copy  a 
definite  description  of  the  items  from  inception  to 
finish.  In  reality  the  one  form  accomplishes  five 
different  and  distinct  results.  The  entries  on  all  of 
the  three  sheets  are  identical,  yet  they  perform  different 
functions  as  outlined,  thus  making  a  substantial  saving 
of  time  possible  and  reducing  the  chances  of  error 
in  this  bank  five  to  one. 

These  forms  provide  for  the  registration  of  a  single 
item  only.  This  may  seem  like  a  waste  of  time  and 
paper,  but  it  must  be  remembered  that  under  the 
old-fashioned  system  each  item  is  recorded  separately. 
Although  many  collections  consigned  to  one  bank  may 


CeUECTION  DEPARTMENT 

NO  PROTEST 

NO.   38488 
TRACED 

CREDIT 

Their  Letter 
Their  No. 

OUR  NO.  38488 

li 


\i 


Figure  79:  This  is  the  third  sheet  of  the  collection  plan  which  has 
operated  to  the  advantage  of  one  bank.  This  copy  is  of  heavy  manila 
and  when  filled  out  serves  as  the  office  record  of  the  transaction 


OFFICE  RECORD 

Number 

Number  or  Date 

Drawee  or    Maker 

Amount 

Date  Received 

Due 

Returned 

B-L  Issued  Railroad         Date 

Special  Instructions 

Paid 

At 

Car  Number     Route 

Order 

Notary 

Notify 

i' 


Figure  80:  This  is  the  original  of  a  collection  record  in  quadruple 
form  successfully  used  by  an  Ohio  bank.  On  page  231  its  important 
features  arc  set  forth.    The  three  copies  are  shown  on  succeeding  pages. 

227 


Hi 


m 


Il 


■I 


™  w 


228 


MAKING  COLLECTIONS  PAY 


be  included  in  a  single  letter;  yet,  for  reasons  already 
given,  time  has  actually  been  saved  under  the  new  plan 
notwithstanding  each  item  is  written  singly  on  its  own 
individual  form. 

After  the  collections  have  been  registered,  the  upper 
half  of  sheets  one  and  two  are  detached  and  the 
advice,  the  debit  and  the  credit  tickets  are  placed  with 
the  third  sheet  in  a  vertical  file  supplied  with  numerical 
tabs.  Each  day's  work  is  separated  and  filed  in 
numerical  order. 

The  collection  letter  accompanies  each  item,  while 
the  duplicate  is  placed  in  an  alphabetical  file  as  a  key 
for  reference,  should  a  collecting  bank  report  without 
giving  the  date  of  the  letter.  At  times  it  is  desirable 
to  know  the  amount  of  outstanding  collections  held 
by  a  certain  bank;  these  letters  quickly  divulge  the 
needed  information.  They  are  also  valuable  adjuncts 
when  filed  with  paid  records,  enabling  one  to  locate 
readily  an  item  about  which  there  may  be  some 
question.  A  four-drawer  cabinet,  approximately  12 
inches  high,  18  inches  wide,  and  18  inches  deep,  pro- 
vides working  and  filing  space  for  thousands  of  records. 

The  city  collection  forms  which  the  bank  uses  are 
also  printed  and  numbered  in  tripHcate,  and  are  tabbed 
in  the  same  manner  as  the  out-of-town  records.  When 
written  up,  the  first  sheet  acts  either  as  a  letter 
describing  an  item  unpaid  or  an  advice  of  credit.  It 
is  useful  for  either — even  if  in  total  contract — and  thus 
enables  the  bank  to  handle  its  records  easily  and 
without  duphcate  effort.  The  second  sheet  is  the 
payer's  notice  as  well  as  the  tickler  for  reference  at 
the  beginning  of  the  day's  work.  The  third  form,  or 
card,  gives  a  description  of  the  collection  similar  to 
its  companion  form  for  recording  out-of-town  items. 

These  forms  may  be  written  on  the  typewriter  or 
with  pen.  The  plan  is  only  one  of  several  to  speed 
collections.     Let  us  consider  also  the  system  by  which 


OWNER 

BOOKKEEPER 

00  NOT  MAIL 

Number  or  Date 

Drawee  or  Maker 

Amount' 

Date  received 

Due 

Figure  81 :  Here  is  the  second  copy  of  the  practical  collection  record 
described  on  page  231.  Notice  that  the  name  of  the  owner  of  the 
paper  goes  in  the  upper  left  space,  making  quick  reference  easy* 


HRST  NATIONAL  BANK  OF  CLEVELAND 


ADVICE 


Number  or  Date 


Drawee  or  Maker 


Date  received 


Due 


CITY  COLLECTION  DEPARTMENT 


lAmount 


Disposition 
We 


Figure  82:  To  advise  the  bank  from  which  an  item  for  collection 
has  been  received,  of  just  what  disp>osition  has  been  made  of  it,  this 
third  copy  of  the  collection  form  meets  all  department  requirements. 

229 


Iil> 


I    I 


i. 


i 


1 


wM 


nRST  NATIONAL  BANK  OF  CLEVELAND 

Received  from                                 ACKNOWLEGMENT 

ONLY 

Number  or  Date 

Drawee  or  Maker 

Amount 

Date  received 

Due 

SPECIAL  ADVICE                                           The  above  described  Item  has 

been  entered  for  collection. 

We  win  consider  It  a  favor  If  you  will  adviae  ua 
of  any  unsatisfactory  handling  of  your  busineaa* 

Figiire  83:  At  the  same  time  that  the  other  copies  of  the  collection 
record  are  made  out,  this  fourth  sheet  is  automatically  prepared  to  be 
mailed  as  an  acknowledgment  of  the  receipt  of  the  item  described. 


THE  FIRST  NATIONAL  BANK, 
CLEVELAND 


To. 


aeveland,  O.^. 


WE  CHARGE  YOUR  ACCOUNT  FEES  AND  RETURN  HEREWITH  THE 
FOLLOWING  ITEM  PROTESTED: 


Maker   or  Drawee 

$ Number. 


.Fees  $. 


The  First  National  Bank 
CLEVELAND 


Office  Record  File 


Bookkeeper.    Do  Not  Mail 


Figure  84:  Since  devising  this  form  one  bank  finds  it  easy  to  keep 
all  uncoUectable  items  separate.  The  original  copy  is  the  advice  to  the 
bank;  the  second  is  for  the  bookkeeper;  and  the  third,  the  office  record. 

230 


METHODS  THAT  INSURE  PROFITS 


231 


an  Ohio  bank  collects  on  time  from  30%  to  40%  of  all 
the  items  it  receives.  It  has  set  a  pretty  good  rec- 
ord, considering  the  obstacles  encountered  in  making 
these  collections. 

When  this  bank  receives  a  draft  for  collection,  the 
teller  in  charge  enters  it  on  a  slip  (Figures  80,  81, 
82  and  83),  which  is  made  out  in  quadruple  form. 
The  first  copy  is  the  office  record  and  is  filed  alphabeti- 
cally according  to  the  name  of  the  drawee  of  the  draft 
or  of  the  maker  of  the  item  to  be  collected.  Spaces 
are  provided  for  the  amount,  for  the  date  received, 
for  the  date  due,  and  so  on.  These  forms  are  used 
principally  for  grain,  produce,  and  other  drafts  where  a 
bill  of  lading  may  accompany  the  item  for  collection. 
Additional  spaces,  for  this  reason,  are  provided  at  the 
bottom  for  information  about  the  shipment  and  other 
advice  from  the  railroad. 

SOMETIMES  A  SPECIAL  FORM  TO  MEET  A  PARTICULAR 
REQUIREMENT  WILL  SAVE  CLERICAL  EXPENSE 

On  the  original  copy,  in  the  upper  right-hand  corner, 
is  a  blank  space  for  entering  any  special  information. 
The  goods  covered  by  the  draft,  for  example,  may  not 
have  arrived  at  the  railroad  station  and  it  may  be 
important  to  register  this  information.  Or  it  may  be 
advisable  to  give  the  item  a  special  number.  All  such 
advice  can  be  entered  in  this  blank  space.  Ordinarily 
when  running  through  any  records  to  find  an  item  and 
see  why  it  has  not  been  paid,  the  eye  naturally  falls  on 
the  data  in  that  particular  corner.  The  information, 
therefore,  can  be  found  readily  without  taking  the 
forms  from  the  file. 

In  order  to  facilitate  the  work  and  save  time,  any 
items  to  be  returned  are  so  designated  by  having  the 
date  the  return  is  made  entered  in  red  under  the  word 
"returned.''  When  items  are  paid,  the  date  is  entered 
in  green  under  the  word  ''paid."    Thus,  any  officer  or 


M 


II! 


•  'i 


CHARGE 


'IRST 

NATIOMA. 

BANr 


Cleveleuid,  O. 


For  Item  Credited  This.  Day   and  Returned  From  Clearance 

Number . Date  . $ 

Drawn  by ^ 


J 


FIRST  NATIONAL  BANK 
CLEVELAND 


For  Item  Credited  This  Day  ajid  Returned  from  Clearance 
Number Date       j 

Drawn  by 


FIRST  NATIONAL  BANK 
CLEVELAND 


Figure  85:  An  Ohio  bank  finds  this  form  convenient  for  charging  back 
uncoUectable  items  sent  in  by  correspondent  banks.  One  copy  is  the 
bookkeepers'  charge  ticket,  the  other  goes  to  the  correspondent  bank. 


Cleveland,  O.. 


^ 


Wc  char](e  your  account  and  return  herewith  the  following  item  received 

in  your  Cash  Letter  of  the instant 

Reason  indorsed 


FIRST  NATIONAL  BANK 
CLEVELAND 


Figures  86  and  87:  Number  1  in  triplicate  is  used  for  charging  back 
items  credited  to  correspondent  banks,  but  not  collected.  The  rubber 
stamps  on  number  2  are  used  to  designate  the  disposition  of  each  item. 

232 


Cleveland,  O. 


The  following  item  received  in  your  Cash  Letter   of   the. 
is    Not    Paid. 

We  charge  your  account  and  Enter  for  Collection. 


.instant 


If  you  do  not  wish  thii  item  held  for  coUection, 
•dvite  us  by  Letter  or  Wire. 
Address  replies  to  City  Collection  Department. 


FIRST  NATIONAL  BANK 
CLEVELAND 


The  following  item  received  in  your  Cash  Letter   of  the 
is    Not    Paid. 

We  charge  your  account  and  Enter  for  Collection. 


instant 


If  you  do  not  wish  this  item  held  for  collection, 
•dvise  us  by  Letter  or  Wire. 

Address  replies  to  City  Collection  Department. 


FIRST  NATIONAL  BANK 
CLEVELAND 


Figure  88:  When  necessary  to  charge  back  to  the  correspondent 
bank  items  handled  as  cash  but  for  some  reason  not  collected,  the  form 
reproduced  here  is  used  by  one  bank.    Three  copies  handle  the  routine* 


REASON 

Account  attached 


REASON 

Account  attached 


REASON 
Account  attached 


REASON 

Account  attached 

Amount 

Dale 

Indorsement 

Maker  assigned 

No  account 

Not  sufficient  funds 

Account  closed 

OrJercd  returned 

P:!Es  book  must  accompany 

Payment  stopped 

Pretested 

Receipt  only 

Receipt  to  voucher 

Signature 

Wo  prefer  not  to  handle 

Drawn  against  uncollected  funds 

Our  correspondents  refuse  to  handle 


FIRST  NATIONAL  BANK.  CLEVELAND,  OHIO 

NO    f,\1\ 


CHARGE 


Mo     f^\% 


FIRST  NATIONAL  BANK,  CLEVELAND,  OHIO 

Returned  to NO.   #%1  "^ 


FIRST  NATIONAL  BANK.  CLEVELAND.  OHIO 

To NO.  613 

Date 


We  charge  your  account  $. 
For  the  following  item  previously  credited: 

Dravm  by 

Bank 


City 

This  item  will  be  returned  to  you  on  the  surrender  of  this  receipt 
properly  signed,  either  by  mail  or  if  presented  to  City  Collection 
Window  No.  11. 


RECEIVED  ABOVE  DESCRIBED  ITEM 

Sifiiwd. 


Date. 


II  Ml  cilM  lor,  Uii*  HtM  will  b»  rttumed  with  vouchtrt  tl  md  ef 


Figure  89:  One  bank  has  saved  much  time  and  avoided  confusion  by 
having  customers  sign  a  receipt  like  this  for  every  uncoUectable  item 
returned.     Pages  235  and  236  explain  the  advantages  of  this  plan. 

233 


■  ! 


^Ij 


I 


•it 
t  > 


V 


234 


MAKING  COLLECTIONS  PAY 


clerk  of  the  bank  can  tell  instantly  from  this  file  just 
what  disposal  has  been  made  of  a  particular  item. 

The  second  copy  of  the  quadruple  set  goes  to  the 
bookkeeper  for  his  advice.  The  name  of  the  bank  from 
which  the  draft  is  received  shows  plainly  in  the  upper 
left-hand  corner,  so  that  the  bookkeeper  can  tell 
immediately  what  account  is  involved.  The  third 
sheet  is  for  the  advice  of  the  bank  from  which  the 
draft  is  received.  The  fourth  copy  is  simply  for  the 
acknowledgment  of  the  item  when  it  is  received.  These 
forms  are  printed  six  on  a  sheet  to  facilitate  the  work 
of  the  teller  in  entering  the  items  received  each  day. 

The  triphcate  form  (Figure  84)  is  used  for  items 
which  the  bank  knows  from  local  conditions  are 
practically  impossible  to  collect.  The  first  sheet  goes 
to  the  bank  which  has  sent  the  collection;  the  blue 
sheet  goes  to  the  bookkeeper  to  enable  him  to  make 
the  proper  charges  for  handUng  the  item;  and  the 
third  sheet,  which  is  yellow,  is  used  for  the  office 
record  file.  The  value  of  this  particular  form  to  the 
bank  is  that  it  easily  segregates  the  doubtful  items 
from  the  good  possibilities  and  makes  the  routine 
easier  to  handle. 

Sometimes  items  which  have  been  received  from 
correspondent  banks  and  have  been  credited  pro 
visionally,  are  found  to  be  impossible  to  collect.  In 
instances  like  this,  it  is  necessary  to  charge  the  items 
back.  Figure  85  shows  how  this  is  handled.  The 
blue  copy  goes  to  the  correspondent  bank,  and  the 
yellow  one  is  kept  for  the  bookkeeper's  advice  and  for 
the  office  record. 

To  save  time  in  bookkeeping  the  rubber  stamps 
(Figure  86)  are  used  at  the  collection  desk  to  show 
whether  the  item  is  to  be  credited,  the  amount  remitted, 
or  the  item  itself  retm-ned.  For  regular  items  on  which 
collection  has  been  expected  but  for  some  reason  has 
not  been  made,  the  form  shown  in  Figure  87  is  used 


METHODS  THAT  INSURE  PROFITS         235 

to  charge  back  the  amounts  which  have  aheady  been 
credited.  The  first  copy  goes  to  the  correspondent 
bank,  the  second  one  goes  to  the  bookkeeper  to  make 
the  proper  charge,  and  the  third  copy  remains  as  the 
collection  department's  office  record. 


CASH  ITEMS  HELD  OVER 


DrawM  or  Maker 


dIDORSER. 


RETURNED  FROM. 
IW>TaiirTioai&j 


D/ 


Htid  over 


Paid 


CASH 


Drawee  or  Maker 


ENDORSER. 


RETURNED  FROM. 
INSTRUCTIONS: 


DATE  RECEIVED. 


HeM  over 


Notary 


Collection 


Paid 


Returned 


Figures  90  and  91:  These  two  forms  are  used  by  one  bank  to  list 
items  credited  as  cash,  but  held  in  suspense  for  some  reason.  The 
"cash"  sheet  is  for  checks  and  the  other  is  for  regular  collections. 

To  notify  correspondent  banks  of  items  which  have 
been  handled  as  cash  and  which  have  not  been  paid, 
but  are  held  subject  to  instructions  for  collection. 
Figure  88  has  proved  an  effective  instrument.  The 
top  sheet  goes  to  the  correspondent  bank  as  its  notifi- 
cation, the  blue  sheet  goes  to  the  bookkeeper  to  make 
the  charge  back  against  the  account  until  collection 
is  made,  and  the  third  sheet  is  for  the  office  record. 

This  same  bank  has  simplified  also  its  methods  for 
handling  the  items  for  collection  received  from  its 
own  customers  by  using  the  form  shown  in  Figure  89. 
Often  a  good  customer  will  offer  a  draft  or  other  item 


fli 


HI! 


236 


MAKING  COLLECTIONS  PAY 


f  '( 


'  »f 


for  coflection  along  with  other  deposits  to  be  credited 
to  his  account.  Perhaps  the  banker  later  finds  it 
impossible  to  make  the  collection. 

"Formerly  we  had  a  great  deal  of  trouble,"  says 
the  collection  manager  of  the  bank,  "because  we 
would  return  items  of  this  kind  to  depositors  and 
charge  their  accounts,  only  to  have  them  later  claim 
their  accounts  were  short.  They  professed  ignorance  of 
ever  getting  the  returned  uncollected  items  back. 
This  naturally  caused  considerable  friction,  and  some- 
times almost  lost  us  customers.  This  new  form  in 
quadruplicate  was  designed  especially  to  take  care  of 
this  particular  problem." 

As  soon  as  an  item  comes  in  from  a  customer  for 
credit  and  collection,  the  information  is  entered  on 
the  original  copy  of  the  record,  and  the  details  are 
automatically  passed  through  carbons  to  the  other 
sheets,  all  of  which  are  nimibered.  The  pink  sheet  is 
inmiediately  attached  to  the  item,  while  the  other 
copies  are  filed  nimierically  pending  the  collection  or 
noncollection  of  the  instnunent.  When  the  item  goes 
out  for  collection,  the  pink  sheet  remains  in  the  file 
to  take  its  place  and  to  act  as  a  substitute  current  record 
while  it  is  out.  If  the  item  comes  back  uncollected  it 
is  filed  in  place  of  the  pink  sheet  which  is  then  taken 
out  and  used  as  a  notification  to  the  customer.  The 
blue  sheet  goes  to  the  bookkeeper  to  make  the  proper 
deduction  on  the  customer's  account;  and  the  fourth 
sheet,  which  is  filed  alphabetically,  acts  as  the  office 
record  of  this  item. 

The  original  or  first  sheet,  however,  still  remains. 
And  it  forms  a  valuable  link  in  the  plan.  When  the 
customer,  on  receiving  the  pink  notice,  comes  in  to 
take  up  the  item,  he  is  asked  to  sign  the  original 
record  as  evidence  that  he  has  received  it  back  un- 
collected. He  also  affixes  the  date.  If  he  does  not 
come  in,  the  item  goes  back  to  him  with  his  vouchers 


METHODS  THAT  INSURE  PROFITS         237 

at  the  end  of  the  month,  showing  automatically  that 
the  charge  has  been  made  against  his  account.  This 
prevents  any  chance  of  misunderstanding  and  loss. 
The  plan  has  saved  tune  and  money,  which  means 
more  profit  at  the  end  of  the  year. 

This  bank  has  also  found  two  other  forms  useful 
(Figures  90  and  91 ) .  Where  items  have  been  received 
and  credited  as  cash  and  have  been  held  over  for  some 
reason,  each  one  is  listed  on  a  yellow  or  an  orange- 
colored  sheet  and  kept  alphabetically  as  a  record  for 
the  following  day  so  that  they  can  be  followed  up  and 
taken  care  of.  The  yellow  sheet  is  used  for  regular 
collection  items  and  the  orange  sheet  for  checks  which 
have  been  taken  in  as  cash  but  held  in  suspense  for 
some  reason.  In  this  way  there  is  no  possibility  of  an 
item  being  overlooked. 

Here,  then,  are  the  practical  methods,  which  a 
number  of  banks  have  worked  out  from  hard  knocks 
and  long  experience,  for  handling  in  the  quickest  and 
safest  way  all  of  their  incoming  and  outgoing  collection 
items.  That  these  methods  have  proved  so  successful 
is  evidence  that  they  will  help  other  bankers  to  short- 
cut their  routine  and  expense,  thus  paving  the  way  to 
greater  profits  at  dividend  time. 


i  h 


w 


nil 


i 


CHAPTER  XVII 
SPEEDING  UP  THE  MESSENGER  SERVICE 

IT  doesn't  much  matter  whether  your  bank  employs 
one  messenger  or  a  dozen,  the  same  fundamentals 
that  make  this  work  effective  apply  equally  well 
to  both.  So  even  though  this  chapter  will  describe 
methods  found  profitable  for  organizing  the  messenger 
service  in  large  banks  and  small,  every  idea  presented 
is  ahnost  certain  to  suggest  ways  to  improve  some 
step  in  your  routine. 

Perhaps  a  sUght  change  here  or  there  will  get  the 
work  done  a  little  quicker  or  a  little  more  accurately. 
Or,  perhaps  the  substitution  of  one  simple  form  for 
one  outgrown  will  save  dollars  during  the  course  of  a 
month  or  year.  At  any  rate,  the  work  of  the  messenger 
is  most  important,  and  it  is  the  piu-pose  of  this  chapter 
to  show  how  some  bankers  have  organized  and  simpli- 
fied this  part  of  the  routine  to  produce  uniformly 
satisfactory  results.  I 

For  banks  which  employ  more  than  one  messenger, 
the  question  of  economical  routing  of  trips  has  to  be 
considered.  Unless  this  point  is  wisely  settled,  lost  time 
and  unnecessary  expense  are  incurred  in  handling  city 
collections.  A  national  bank  in  the  South  has  facili- 
tated its  work  by  dividing  the  city  into  eight  districts 
and  routing  the  messengers'  trips  definitely  over  each 
territory.  One  man,  of  course,  is  assigned  to  each 
route,  making  eight  messengers  in  all. 

Six  other  workers  handle  the  inside  accounting 
details  of  the  collection  department.    Two  of  these 

23S 


II 


WHAT  THE  MESSENGER  CAN  DO 


239 


clerks  transact  effectively  considerable  business  over 
the  telephone,  covering  in  this  way  collections  in  out- 
lying districts  not  reached  by  the  eight  messengers. 

Each  of  the  outside  collectors  has  a  route  sheet  which 
he  returns  to  the  head  of  the  department  at  the  close 
of  each  day.  From  his  entries  the  collections  are 
checked  up  and  the  records  brought  up  to  date.  Under 
this  plan  some  of  the  outside  collectors  cover  only  one 
or  two  buildings  where  the  number  of  drafts  presented 
each  day  is  heavy. 

The  outside  messengers  also  handle  other  important 
duties.  A  bank  which  is  not  a  member  of  the  clearing 
house,  for  example,  receives  its  items  each  day  from  a 
messenger  and  gives  in  return  a  cashier's  check  covering 
the  amount  outstanding.  Again,  the  tellers  in  the 
credit  department  may  ask  the  collection  department 
for  information  concerning  checks  which  are  drawn  on 
other  banks  and  offered  for  payment.  When  there  is 
any  doubt  about  the  value  of  these  checks,  the 
messengers  take  them  to  the  bank  on  which  they  are 
drawn  to  get  them  certified.  This  plan  makes  each 
item  negotiable. 

By  dividing  the  city  into  definite  districts,  as  aheady 
indicated,  the  messengers  are  enabled  to  become 
acquainted  with  the  business  men  and  to  develop  a 
spirit  of  helpful  friendliness  with  each  one.  Thus 
the  danger  of  any  outside  collector  bemg  tempted  to 
soUcit  business,  or  of  becoming  too  aggressive,  is 
lessened.  Having  regular  routes,  each  one  too,  comes 
to  know  pretty  well  the  standing  of  various  business 
men.  When  this  is  satisfactory,  payers  are  sometimes 
permitted  to  hold  drafts  for  a  day  or  two;  others  who 
are  not  so  dependable  are  denied  this  privilege. 

Not  long  ago  a  dealer  in  wool  offered  his  check  to 
cover  a  draft  for  $2,500.  Before  releasing  the  draft, 
however,  the  messenger  insisted  on'  determining 
whether  the  check  was  good.    When  he  went  to  the 


!!l 


i 


• 


if 


i 


li  i  I 


m 


240 


MAKING  COLLECTIONS  PAY 


dealer's  bank  he  found  that  the  deposit  balance  was 
insufficient  to  pay  the  check.  This  is  one  example  of 
many  showing  how  the  trained  messenger  exercises  his 
judgment  wisely  to  look  after  the  bank's  interests.  He 
helps  to  minimize  the  number  of  checks  returned 
daily  on  account  of  insufficient  balances,  improper 
signatures,  or  the  lack  of  adequate  indorsement. 

YOUR  MESSENGERS  CAN  RENDER  VALUABLE  ASSISTANCE 
IF  THEY  ARE  ON  THE  ALERT 

The  city  collection  department  of  one  bank  handles 
daily  an  average  of  15,000  incoming  and  4,500  out- 
going pieces  of  mail.  Some  of  this  mail  relates  to  the 
accounts  of  corporation  customers  who  want  their 
vouchers  sent  to  the  main  offices  at  the  close  of  each 
day.  The  messengers  carry  the  packages  of  vouchers 
to  the  corporation  offices  and  take  receipts  for  them. 
This  helps  to  cut  the  cost  of  the  outgoing  items,  includ- 
ing about  $100  a  day  in  postage  and  express  charges. 

This  bank,  like  many  others,  seldom  has  any  trouble 
with  the  big  mercantile  and  industrial  accounts. 
Usually,  it  is  the  small  customer  who  bears  close 
watching.  When  the  little  fellow  orders  merchandise 
in  large  lots,  he  is  sometimes  careless  about  planning 
to  meet  the  drafts  at  the  time  agreed  upon  for  presen- 
tation. Although  he  is  promptly  advised,  it  is  not 
uncommon  to  hear  him  complain  that  he  did  not 
receive  the  notice.  This  class  of  business,  therefore, 
requires  extraordinary  caution  and  the  alert  messenger 
never  gives  the  dealer  an  opportunity  to  defend  him- 
self with  flimsy  excuses. 

Thus,  the  messenger  should  be  quickly  trained  to 
comprehend  the  importance  of  his  task  and  the  value 
of  the  paper  he  carries  with  him.  By  confining  his 
work  to  a  certain  fixed  territory,  Uke  the  southern  bank 
has  done,  the  messenger  finds  it  easier  to  meet  men  on 
his  route  and  to  learn  their  habits  of  doing  business^ 


®                                      CITY  COLLECnOMS 

OMt 

Fraa  Whwn 

Dnmtn 

°0;^      H-Ditpo-    A-^-i     |''««|;!SSSl 

Bin 
Udina 

11 

k>- 

t 

i 



:  ® 

CITYCOllEnTIONS 

1 

- 

— — 1 

^             rWJI^n 

Frgm  WhMi 

RtCwWs 

Uttm 

Onratnand         AawMt 
Uttmwm 

Ittat         OMt   TwmJRaU 

DupmMM 

— 

1 

-P 

1 

l>                  1 

■~- 

i 

1 

i"  p-*'     '-  i-=m 

i 

— 

■ 

bL 

1 

"* 

1^ 

1 

_ 

1 

— 

1 

"1 

L. 

1 

" 

1 

" 

_._L 

r 

Figures  92  and  93:  To  handle  city  collections  easily,  one  bank  col- 
lection department  lists  all  regular  items  on  sheets  like  number  1. 
Notes  are  entered  separately  for  convenience  on  sheets  like  number  2, 


THE  NORTHWESTERN  NATIONAL  BANK.MINNEAPOUS 
Collection  Department 

Payer* 

Due 
Dati 

Amount 

Disposition 

Payers 

Date  1 A"^""*  I  Disposition 

=                        THE  NORTHWESTERN  NATIONAL  BANK  MiNNEAPOUS 
I                                        Collection  Department 

H 

From  Whom 
Received 

Description 

Date       Instructions 

Payer 

Disposition 

=U;i 

b 

c 

-L^=p. 

— — 

1 1  iTn — 1 ■ 

7~^ 

^     IT      1     1     1      !     1 T 

— — r 

3 

_c~L 

p  111  Ll    t  hi fl =^ 

1 --xi-— 

= 

_ 

mm 

mm 

= 

1 

w 

1 

1 

— 

II 

1                                                  1                                                        1 

^ 

I 


m 


I 


Figures  94  and  95:  One  bank  finds  this  record  of  collection  items 
useful.  The  upper  sheet  is  for  regular  collections  and  the  lower 
record  is  for  items  on  which  real  estate  or  other  security  is  held. 

241 


'?! 


t 


B«««MI««#W«MM»«»««V«»««r««««tf«N»«»«| 


I  ®  THE 

i  NORTHWESTERN  NATIONAL  BANK 

I  COLLECTION  DEPARTMENT 


Minneapofis,  Mirni.,. 


] 


Dear  Sir: 

We  beg  to  enclose  our  draft  for  $ , 
in  payment  of  collection  as  follows; 


Ml 


'W«*w«wwtf««  S 


Toon  tnily, 
R.  E.  MacGregor.  Casiuer 


iTkt 


h  ■ 


i® 

I      NORTHWESTERN  NATIONAL  BANK 

COLLECTION  DEPARTMENT 


THE 


Minneapolis,  Minn... 


; 


We  Credit  Your  Account 


Date  or  Number 


Description 


Amount 


For  the  collection  of  all  items  payable  outside  of  this  dty,  iht 
Northwestern  National  Bank  will  observe  due  diligence  in  its  endeavor 
to  select  responsible  agents,  but  will  not  be  liable  in  caae  of  their  fai]- 
are  or  negligence  or  for  loss  of  items  in  tha  m»it^ 

R.  E.  MacGregor,  Cnhier 


»  *•  mm^^tmmttm* 


mmm^»mmm 


MMMk*««*«>*«««««MI 


Figures  96  and  97 :  Number  2  is  a  convenient  method  for  advising  cus- 
tomers of  credits  for  collections  made.  It  is  made  up  in  the  simplest 
form.  Number  1  (Form  97)  is  used  when  payment  in  settlement  of 
collections  is  required.    Each  item  can  be  listed  in  the  shortest  time, 

242 


WHAT  THE  MESSENGER  CAN  DO 


243 


A  northwestern  bank  exercises  similar  thoroughness 
in  regulating  the  city  collections  within  the  bank, 
which  in  turn  insures  smoother  handUng  of  the  work 
of  the  messengers.  If  the  inside  routine  is  not  up  to 
standard  the  outside  collecting  is  pretty  apt  to  show 
signs  of  carelessness.  When  the  mail  is  received  it  is 
sorted  into  four  divisions:  Notes;  drafts;  remittances 
in  payment  of  out-of-town  collections  which  are  given 
to  the  country  collection  department;  and  special 
transactions,  such  as  real  estate,  bonds,  and  so  on. 

When  the  city  collections  are  received  they  are 
entered  on  the  record  shown  in  Figure  92.  Each  city 
item  is  numbered  on  the  back  to  conform  to  the 
numbers  on  the  sheet.  Thus  the  clerk  finds  it  simple 
to  locate  any  item  in  case  it  is  returned  to  him  by  the 
messenger.  All  notes  are  entered  on  a  form  like 
Figure  93  and  then  they  are  filed  according  to  their 
maturity.  All  letters  of  transmittal  are  retained  by 
the  collection  department  until  the  items  which  they 
contained  are  accounted  for.  Two  files  are  used  for 
the  purpose.  In  one  are  filed  the  letters  from  the  bank's 
correspondent  and  in  the  other  all  miscellaneous 
letters  are  placed. 

Notes  received  from  city  customers  are  entered  on 
Figure  94.  These  sheets  are  kept  in  a  looseleaf 
binder  and  indexed  alphabetically.  The  notes  are 
filed  according  to  maturity,  the  same  as  the  notes 
received  from  out-of-town  correspondents.  This 
method  has  proved  to  be  very  helpful  because  it  acts 
as  a  reminder  to  customers  who  leave  notes  for  collec- 
tion and  who  forget  the  due  dates.  It  also  affords  a 
quick  check-up  on  any  information  desired  without 
having  to  refer  to  the  notes  themselves.  This  is 
important  because  it  usually  takes  time  to  locate  the 
note  unless  the  exact  maturity  is  known. 

In  recording  collections  on  real  estate  deals,  bonds, 
and  other  miscellaneous  matters,  the  bank  has  found 


III 

Ml 


I     i 


i 


I 


244 


MAKING  COLLECTIONS  PAY 


the  record  shown  in  Figure  95  to  be  an  effective  time 
saver.  When  sending  out  advices  of  credit  to  customer 
concerns  or  correspondent  banks,  Figure  96  meets  all 
the  requirements  effectively. 

When  a  remittance  is  necessary,  a  form  like  Figure 
97  is  attached  to  the  check  or  draft.  This  method  of 
settlement  applies  to  all  concerns  which  do  not  carry 
a  balance  with  the  bank. 

In  this  bank  the  operation  of  the  country  collection 
department  is  worth  noting,  since  the  plan  differs  from 
the  clearing  house  method  described  in  a  previous 
chapter.  To  put  through  an  item,  a  sUp  (Figure  98) 
is  made  out  in  duplicate.  These  forms  are  printed 
eight  on  a  page  for  convenience  in  handling.  The 
original  slip,  which  is  of  light  paper,  is  sent  out  with 
the  item,  and  the  copy,  printed  on  tough  manila,  is 
retained  as  the  office  record  and  filed  alphabetically. 
In  order  to  keep  track  of  the  business  as  it  is  recorded 
on  these  cards,  a  customers'  looseleaf  ledger  (Figiu-e 
99)  is  used.  The  payment  or  the  return  of  the  items 
is  noted  in  the  book  and  the  cards  are  later  filed 
according  to  the  months  in  which  they  were  sent  out. 

All  of  these  plans  insm-e  prompt  action  on  collection 
items  and  thus  indirectly  at  least  reflect  more  satis- 
factory service  on  the  part  of  messengers. 

The  methods  which  have  been  described  are  adapt- 
able to  almost  any  reserve  city  bank  and  they  also 
suggest  ideas  which  can  be  used  to  advantage  in  many 
of  the  larger  of  the  so-called  country  banks.  Let  us 
turn  now,  however,  to  a  plan  that  is  in  successful 
operation  in  a  bank  located  in  a  city  of  about  100,000. 
This  bank,  like  many  others  of  the  same  class,  did 
not  for  a  long  time  handle  incoming  collections  as 
accurately  and  as  promptly  as  it  should  have  to  gain 
the  best  results,  and  the  head  of  the  department  was 
compelled  to  adopt  new  plans  in  order  to  eliminate 
duplication   of   effort   and   involved   processes. 


Ca 

Sui 


IF 

otli 


IN 


Capital,  $4,000,000 
Surplus,  $2,000,000 


COLLECTION  DEPARTMENT 

Northwestern  National  Bank 

MINNEAPOLIS.  MINN., 


NO  PROTEST 

We  enclose  this  item  for  collection  and  returns. 

IF  NOT  PAID  WHEN  DUE  RETURN  AT  ONCE,  unless 

otherwise  instructed  by  us. 

To  Be  Paid  by 

Due 

Amount 

INSTRUCTIONS: 


Return 
This  Ticket 
TI  with  Your 
Advice  or 
Remittance 


F 


S.K,  PLUMMER,  Cashier 

NORTHWESTERN  NATIONAL  BANK 

Minneapolis,  Minn. 


Date. 


Number . 


Their  Date 


Amount 


Their  Date 


ij 


Figure  98:  For  labor  saving,  this  plan  for  handling  coimtry  col- 
lections has  proved  satisfactory.  The  ticket  is  made  out  in  duplicate 
and  printed  eight  on  a  page  for  convenience.  The  original  is  sent 
with  the  item  and  provides  a  simple  method  for  advice  or  remittance. 

245 


rt'-f 


246 


MAKING  COLLECTIONS  PAY 


»! 


In  order  to  understand  the  advantage  of  the  method 
to  be  described,  it  is  necessary  to  refer  briefly  to  the 
various  operations  this  bank  previously  required  to 
handle  its  collections.  First,  all  collections  were  entered 
in  the  collection  register,  a  bound  book  of  approxi- 
mately 300  pages,  each  page  having  numbered  spaces 
for  60  items.  Each  page  was  divided  into  several 
columns  for  the  purpose  of  entering  information  per- 
taining to  the  item  to  be  entered.  The  usual  headings 
for  the  different  colimms  were: 


WHAT  THE  MESSENGER  CAN  DO 


247 


1.  Date  received 

2.  Our  number 

3.  Name  and  address  of  owner 

4.  Owner's  date  or  number 
6.  Protest  or  no  protest 

6.  Amount 


7.  Date  of  paper 

8.  Due  date 

9.  Interest  accrued 
10.  Date  paid 

IL  Date  returned 


After  the  items  were  entered,  they  were  numbered 
and  sorted  according  to  the  payer's  street  address. 
Those  within  the  messenger's  district  were  handed  to 
him  for  personal  presentation;  others  were  either 
handed  to  the  draft  clerk,  who  sent  out  mail  notices,  or 
were  attended  to  by  telephone  calls. 

As  in  other  banks,  the  messenger  made  a  list  of  the 
amoimts  of  all  items  handed  to  him  to  provide  a  check 
on  his  work  when  he  made  his  returns  later.  He  then 
made  his  calls  in  regular  order.  When  he  received 
payment  for  an  item,  he  made  out  a  remittance  ticket 
or  a  credit  ticket,  depending  on  whether  the  item  had 
been  received  for  collection  and  remittance,  or  for 
credit  and  advice.  It  was  in  making  out  these  tickets 
that  mistakes  sometimes  were  made,  especially  when  a 
new  messenger  was  pressed  into  service.  For  collec- 
tions, as  a  rule,  pass  through  the  routine  of  several 
banks,  most  of  which  use  a  general  blank  indorsement 
stamp  on  them.  The  result  was  that  the  messenger  was 
likely  to  pick  any  one  of  the  indorsements  as  the  last 
one,  and  make  out  his  ticket  accordingly.    At  times 


the  error  was  overlooked  when  the  item  was  brought 
back  to  the  collection  teller.  Items  on  which  payment 
was  refused  upon  presentation  by  the  messenger  were 
brought  back,  the  reason  for  dishonor  being  marked 
on  the  back  of  the  item. 

Upon  returning  to  the  bank,  the  collector  handed 
the  ticket  representing  items  paid,  the  checks  and 
currency,  and  also  the  dishonored  items,  to  the  collec- 
tion teller  who  checked  them  against  the  list  made  out 
by  the  collector  before  starting  on  his  trip. 

In  the  meantime,  the  teller  had  received  payment 
for  several  items  or  received  orders  to  return  other 
items.  For  the  items  paid  over  the  counter,  the  teller 
had  to  make  out  tickets,  which  delayed  the  customers. 

ONE  BANK  CUT  OUT  A  LOT  OF  WORK  BY  HANDLING 
ITS  COLLECTIONS  IN  THIS  WAY 

At  the  close  of  the  day  paid  and  dishonored  items 
were  marked  off  the  register.  This  work  was  usually 
turned  over  to  the  draft  clerk  who  naturally  was  not 
so  familiar  with  the  entries,  as  he  had  not  seen  the 
original  items  and  therefore  did  not  always  catch 
errors  made  in  the  ticket.  Remittance  tickets  and 
credit  tickets  were  listed  in  the  collection  teller's  cash 
book.  Next,  the  notifications  were  prepared  for  the 
different  correspondents  who  were  to  receive  credit. 
Items  dishonored  were  returned.  This  made  another 
letter  necessary.  In  addition  the  remittance  letters 
had  to  be  prepared  and  this  included  the  work  of 
making  exchange  deductions.  Most  all  of  the  work 
was  done  by  the  draft  clerk  who  also  wrote  up  the 
drafts  accompanying  the  remittance  letters. 

From  the  above  description  it  is  evident  that  even 
in  this  so-called  country  bank  there  occurred  daily 
a  number  of  problems  to  consider  in  handling  effectively 
the  routine  work  of  collections.  Indeed,  it  is  just  as 
big  an  activity  relatively  as  in  the  large  city  bank,  for 


i! 


ill 


IV: 


THE  NORTHWESTERN  NATIONAL  BANK.  MINNEAPOUS 
Collection  Department 

k) 

On  Whom 
Drawn 

Where 
Payable 

Amount 

Disposition 

On  Whom 
Drawn 

Where 
Payable 

Amount 

Disposition 

r — ■"       ] 

WHAT  THE  MESSENGER  CAN  DO 


249 


Figure  99:   A  record  of  items  sent  out  on  the  slips  shown  in  Figure  98 
b  made  on  this  looseleaf  register  which  is  especially  helpful  for  reference. 


NO.    1498 


COUECTION  DEPARTMENT 

GRAND  RAPIDS  NATIONAL  CITY  BANK 


GRAND  RAPIDS,  MICH.^ 

Wl 

Insert  below  the  word  "CREDIT"." 

REMIT"or"RETURN" 

WE 

0¥mer  of  Paper 

Address 


Their  Date 

Their  No. 

Name  of  Payer 

Amount 

Date  off  Paper 

Interest 

Due  Date 

Total 

Note 

Less  Exclig. 

B-L 

Sight  Draft 

Net 

8 


.191 


DETURN' 


CHECK  ABOVE  WHETHER 
NOTE  B-L  OH  SIGHT  ORAn. 


Protest 


Remit  to 


Other  Instructions 


lount 


Bt 


91. 


URN" 


Figure  100:  Instead  of  keeping  laborious  collection  records,  one  bank 
uses  these  slips  made  out  in  triplicate;  one  is  for  the  permanent  files, 
one  for  advice  of  disposition,  and  one  for  the  owner  of  the  paper. 

248 


return  letters,  remittance  letters,  letters  of  advice,  and 
so  on,  are  necessary  for  carrying  on  the  department. 
Furthermore,  proper  service  to  customers  is  just  as 
important  with  one  messenger  on  the  payroll  as  with 
20.  Therefore,  it  was  to  do  away  with  a  lot  of  this  work 
and  yet  raise  the  service  of  the  department  to  a  high 
standard,  that  the  following  new  plan,  which  has 
proved  most  practicable,  was  worked  out: 

Instead  of  the  bound  register,  a  set  of  triplicates  the 
size  of  deposit  tickets,  all  made  out  practically  alike 
(Figure  100),  are  arranged  in  book  or  pad  form  with 
cardboard  cover.  They  are  printed  16  to  20  on  a  page, 
and  perforated  so  as  to  be  easily  detachable.  A  set 
of  these  tripUcates  serve  not  only  as  a  register;  but 
also  as  a  remittance;  a  credit  or  a  return  ticket;  a 
remittance  letter  and  an  advice  of  credit  letter,  or  a 
return  letter.  The  tickets  are  all  numbered  and  the 
copies  bear  the  same  numbers  for  checking  and  ref- 
erence. The  slips  for  handUng  foreign  collections  are 
somewhat  similar  (Figure  102). 

When  a  collection  is  received  the  data  called  for  on 
the  ticket  is  written  in  the  spaces  provided.  The 
item  is  then  given  the  same  number  as  that  on  the 
ticket,  which  facilitates  handling.  The  original  shp 
becomes  the  office  copy,  and  is  filed  numerically.  It 
therefore  takes  the  place  of  the  register,  remaining  on 
the  teller's  desk  until  the  collection  is  taken  care  of. 

The  duplicate  is  attached  to  the  collection,  and 
becomes  either  a  deposit  ticket,  a  remittance  ticket,  or 
a  return  ticket  according  to  the  disposition  of  the  item. 

The  triplicate  stays  on  the  teller's  desk  until  the 
item  is  taken  care  of.  After  that  it  becomes  either  an 
advice  of  credit  to  the  customer,  a  remittance  letter  to 
accompany  the  draft,  or  a  return  letter  to  go  with  the 
item  to  be  returned.  To  accomplish  this  the  teller  uses 
three  rubber  stamps  which  carry  the  date  and  read 
respectively,  ''credit,"  ''remit,"  and  "return." 


tfi 


ho 


COLLECTION  DEPARTMENT 


AfBYinfttt  ^*/i<ittrf  JUt  MAJiirtf^t. 


OtMMT 


Ond 

X 
ivmtm'  Predacts  Coapaay 
49  W.  Spracua  *«• 
Cradlt  Accooat 


&a 


TME  010  NATIONAL  BANK 

COLLECTION  OEPAITMENT 
Sookuw.  Wash.  April  IS.  191«. 

lUllOBal  B««k  of  Cb«B«y 

Chan*}.  f»*h. 

tMW  »  ■  -■ ^u^  *-—  -       *  ^-  -  ^  II  H  I  ■■!  1  ■ 

w*  EimoOT  niv  npHOwmi  nif  ^onacnon  am 
ftoturnt:  nUSE  REMIT  lY  OUR  NMMa 


Our  No. 


Ufswn  ofi> 


Ohanay  Cash 
0    l/L        *tt. 


Stoi  t     49  90 


— rr~  I        1^ 

A       MflOTOT   muummmmirmm 
IV>v  M  Ml  CKMT  am.  MM 

I  Vl  m»fmxmuim  w  tmm     . 


Figure  101:    For  all  outside  collections  a  western  bank  employs  this 
concise  form.  Note  how  all  the  data  is  entered  plainly  for  quick  reference. 


foreign  collection  department 
Grand  Rapids  National  City  Bank 

GRAND  RAPIDS,  MICH. 


19 


please  report  by  no_i2  11 


OWNER  OF  PAPER 


THEIR  DATE 

THEIR  NO. 

Name  of  Payer 

Amount 

Date  of  Paper 

Doe  Date 

Total 

Note 

Less  Exchange 

B-L 

Siffht   Dr«ft 

Net 

Check  above  whether 
Note  B-L  or  Sight   Draft 

1 

PROTEST 

GcBtlemen:  We  eacloae  the  above  deacribed  item  for  coUcctkio  and  letum.  PtesM  obeerve 
tl»e  fgOowinc  iaatnictioaa:  Pratcat  aQ  itema  $10  or  over  uakaa  otherwiae  iaatructed.  Drafts 
•ridi  Billa  of  Lading  attached  mmy  be  bdd  for  arrival  of  gooda.  unleaa  otherwiae  aUted.  Do 
aot  hold  oollectiana  for  convenience  of  pnrtiea.     Deliver  docuncnta  only  upoa  payatent  of  itetna 


GRAND  RAPIDS  NATIONAL  CITY  BANK 


Figure  102:  So  well  did  the  collection  system  illustrated  in  Figure 
100  work  out,  that  this  slip  in  quadruplicate  was  adapted  successfully 
for  foreign  collections.     It  no  doubt  offers  ideas  for  other  banks. 

250 


THE 
OLD  NATIONAL  BANK 

at  »pefc«n«.  Wwhingtaa 
COLLBCTION  DEPARTMENT 
CMDfT  S//a    .,. 


^-'-'■'Y'. 


VOint  ACCOUNT  HAS  BEEN 

CSBOITEO  WITH  ITEM 

DCaCRIBBO  HEKBON : 


^^ 


i^Ao 


ms 


MV 


10 


IWn 


THE 
OLD  NATIONAL  BANK 

of  HpnlraiMi.  Wirtingtoa 
COUSCTION  OEPAltTMBNT 


THE 
OLD  NATIONAL  BANK 

WapokaaauWa 


cuorr 


COLLBCTtON  DCPAItTMSIfT 


1*1.  i  cuorr 


.in_ 


VOUR  ACCOUNT  HAS  BEEN 

CREDITED  WITH  ITEM 

DESCRIBED  HEREON: 


YOUR  ACCCK 
CRtomuD  WTTH 
DBSCIUBEDI 


! 


N<k. 


Figure  103:    One  bank  uses  this  simple  form  to  advise  a  customer 
that  his  savings  account  has  received  credit  for  a  collection  made. 


TRACER 


D.  W.  Twoby.  IVeaidcnt 
T.  J.  Hambird.  Vica^prcaMlcm  W.  D.  ViaecM.  Viec 

J.  A.  YeooMma,  Caahter 
.  J.  laaitliaoa        O.  H.  Otcanwood  J.W.Bradley       R  L. 


THE  OLD  NATIONAL  BANK 

OF  SPOKANE 
UNITED  STATES  DEPOSITARY 

Capital  $1,200,000.00 


COLLECTION  DEPARTMENT 

PLEASE  REPORT  on  items  described  below,  for'whteh  we  do  not  ap- 
pear to  have  received  advice  rcmittaiice.  If  unpaid  Jcindly  return  at  oocc. 
«cept  B/L  draft..  j  ^  y^OMANS.  Caduai. 

Dtu  seat  Dcscnptioo  Number 


PLEASE  REPLY  HERB: 


Figure  104:  To  make  the  collection  service  as  thorough  as  possible, 
this  tracer  form  is  used  to  follow  up  the  advice  in  Figure  101.  The 
blank  spaces  make  it  ea«y  to  fill  in  all  the  necessary  information. 

251 


Wl 


252 


MAKING  COLLECTIONS  PAY 


ipili 

•I 


As  just  mentioned,  both  original  and  triplicate  are 
retained  on  the  teller's  desk  until  the  disposal  of  the 
collection  is  determined.  The  duplicate  stays  with 
the  collection  until  it  is  paid,  and  then  comes  back  to 
the  teller.  If  the  item  must  be  retxu-ned,  the  duplicate 
also  comes  back  to  him.  Therefore,  as  soon  as  he  can 
dispose  of  an  item,  he  has  all  three  tickets  on  his  desk, 
in  different  piles,  but  all  numbered  the  same. 

To  show  how  simply  the  plan  works,  let  us  suppose, 
for  instance,  that  an  item  is  paid  and  must  be  credited. 
The  teller  brings  together  all  three  tickets  pertaining 
to  this  item  and  stamps  **  credit "  in  the  spaces  provided 
for  the  purpose.  The  original  goes  to  the  permanent 
file,  the  duphcate  becomes  the  deposit  ticket,  and  the 
triplicate  is  mailed  to  the  depositor  as  an  advice. 

Suppose  an  item  is  paid  and  must  be  remitted  for. 
All  three  tickets  are  stamped  "remit."  The  original 
goes  in  the  file;  the  duplicate  goes  to  the  draft  clerk 
as  a  draft  ticket  and  is  an  order  to  him  to  issue  a  draft; 
and  the  tripHcate  becomes  the  remittance  letter, 
accompanying  the  draft  to  the  payee. 

If  an  item  is  to  be  returned,  all  three  tickets  are 
stamped  "return"  and  the  original  thus  marked  goes 
to  the  file.  The  duplicate  is  only  of  use  as  a  daily 
record  of  returned  items.  The  tripUcate  goes  back 
with  the  dishonored  item. 

Exchange  deductions  on  a  remittance  should  be 
made  by  the  collection  teller,  because  the  duphcate  is 
an  order  to  draw  a  draft  and  therefore  must  be  net. 
It  is  hardly  necessary  to  state  that  the  teller  should 
keep  his  originals  and  triplicates  in  their  regular 
numerical  order  to  insure  quick  reference  if  desired. 

This  sytem  has  been  of  great  assistance  in  backing 
up  the  messenger  service.  It  has  enabled  each  collector 
to  put  through  his  items  promptly,  and  has  minimized 
errors  and  misunderstandings.  The  plan,  in  fact,  has 
eliminated  all  confusion,  so  that  the  messengers  leave 


WHAT  THE  MESSENGER  CAN  DO  253 

each  morning  with  a  clear  idea  of  just  what  items  they 
have  in  hand.  They  know  also  that  their  work  must  be 
done  accurately  because  the  inside  routine  requires  a 
concise  check-up  on  each  transaction  when  they  return 
to  the  bank  at  the  end  of  each  trip.  Thus,  mistakes 
are  rare  and  detailed  effort  is  accomplished  easily. 

THIS  BANK'S  COLLECTION  SYSTEM  HAS  THE  ADVANTAGE  OF 
BEING  COMPREHENSIVE  WITHOUT  BEING  CONFUSING 

A  northwestern  national  bank  with  $1,200,000 
capital  uses  still  another  idea  that  has  produced 
decidedly  effective  results  in  raising  the  standard  of 
collection  service.  It  is  the  collection  letter  repro- 
duced in  Figure  101  which  is  printed  on  blue  paper  and 
provides  for  Usting  all  items  except  city  collections. 
The  items  are  handled  in  a  series,  those  received  from 
individuals  taking  one  set  of  numbers,  those  from 
banks  another,  and  those  from  the  credit  department 
still  another  set. 

In  order  to  avoid  conflict  with  each  other,  the  most 
active  of  the  series  takes  the  highest  consecutive 
numbers.  The  tab  (Figure  104)  printed  in  red  is 
used  for  a  tracer  where  necessary  and  two  duplicate 
records  are  kept  in  the  files  of  the  bank  for  reference. 
When  payment  of  the  item  is  received  it  is  returned 
with  the  proper  advice.  The  reference  ticket  is  then 
taken  from  the  files  and  sent  to  the  closed  records. 

By  using  a  rubber  stamp  under  the  word  "tracer" 
the  bank  indicates  the  date  the  item  is  sent.  If  the 
response  is  perfunctory,  this  is  indicated  at  the  right. 
When  a  collection  is  received  from  another  bank,  the 
number,  besides  being  placed  on  the  item,  is  also  placed 
on  the  letter  which  is  filed  in  an  ordinary  file  and  taken 
off  at  the  same  time  the  blue  letter  is  removed  from  the 
current  book.  The  disposition  of  the  item,  as  indicated 
by  the  messenger,  is  marked  on  the  correspondent 
bank's  letter,  which  is  then  filed. 


THE 
OLD  NATIONAL  BANK 

of  Ipnl— i.WMhM^aa 
COLUCnON  tSCPAKTMBNT 

MAIL  TO  .—jjuuvnt    I    MAIL  TO 


THE 
OLD  NATIONAL  BANK 

COLLBCTION  DBPASnONT 


gn-     I -it     Oiff 


! 


..2^ 


A^O. 


YOUR  ACCOUNT  HAS  BUN 

CRBDITBD  WITH  ITSM 

DUCRIBSO  HSIISON. 


THE 
OLD  NATIONAL  BANK 

of  »nn  i.wmiii^w 
COULICTION  OEFAKTMSlfT 

MAiL  TO  ■»»-. 


YOUR  ACCOUNT  HAS  BKBN 

CKBDtTEO  WITH  ITKM 

DCSCIUBBO  HUBON. 


YOUR  ACCOUNT  HAS  BUN 

CKtDITSO  WITH  ITBM 

DUCJUBBO  HUaOHi 


Jdl 


%t 


Figure  105:  Here  is  a  simple,  compact  form  that  has  proved  useful 
to  one  bank  when  passing  credit  to  a  customer's  checking  accoimt. 
Note  that  the  date  of  the  item  is  given  to  permit  of  quick  identification. 


r 


DRAFT  REQUEST 

FROM 
COLLECTION  DEPARTMENT 


THE  OLD  NATIONAL  BANK  I 

SPOKANE,  WASH.  | 


^-     X^ 


^J 


Date 


^/ 


Number 


Description 


Amount 


Exchange 


:^off^ 


-^t/i^^^^l  ff^' 


^^ 


Figure  107:  Here  is  the  way  one  bank  puts  through  an  order  for 
a  draft  to  be  issued  to  a  non-correspondent  bank  for  collections  made 
in  its  favor.     Note  the  space  for  the  entry  of  the  exchange  charged. 


11=! 


m 


THE  OLD  NATIONAL  BANK  ^IS^t 

>^xx^  T^J^y  7?ff>^J-                   1 

Date 

Number 

Detcriptioa 

Amount 

Exchange 

Amount 
Credited 

*//*> 

im 

/"/.^J^J^^fL 

fU 

/d 

/l!9 

f^ 

" 

^ 

j__ 

S=I 

Figure  106:  This  form  is  used  by  the  collection  department  to  notify 
a  country  bank  that  an  item  has  been  collected  and  placed  to  itt 
credit.    The  facts  given  make  a  complete  record  of  the  transaction. 

254 


THE  OLD  NATIONAL  BANK 

Capital  $1,200,000 

Spokane,  Washington^  5  10 

Seattle  National  Bank. 

Seattle.  Washington 


We  enclMe  our  draft  on 
the  following  collections: 


for  $     497.50       in  payment  of 


Date  of      11      Your 
your  letter  I    Number 


Description 


4     27 


50990 


Great  Falls,  Montana 


Amount  \  Exchange 


49a 


50 


Oiir  facilities  are  unexcelled  for  hand* 
ling  not  only  Spokane  collections,  but 
items  on  any  point  in  Washington,  Idaho 
and  Montana. 


1 


Figure  108:  When  remitting  to  a  country  bank  on  a  collection  made, 
this  typewritten  form  is  used  as  an  advice.  While  it  contains  the 
same  data  as  given  in  Figure  107,  it  has  a  more  finished  appearance. 

255 


> 


256 


MAKING  COLLECTIONS  PAY 


k  w 


Rather  than  have  other  departments  conform  to  the 
collection  forms,  the  collection  department  seeks  to 
adjust  itself  to  theirs,  and  therefore  a  separate  entry  is 
necessary   when   credits   or   remittances   are   made. 


Name                                            datk 

DRAWN  ON 

OUT            1              IN 

1 

1 

^"^ 1 

— 



' 

—1 

r-1 

n 

Figure  109:  One  bank  has  raised  the  standard  of  its  messenger  service 
by  using  this  very  simple  form  which  every  messenger  fills  out.  The 
*  'in"  and  *  'out"  colunms  show  the  disposition  of  each  item  taken  out. 

Various  departments  of  the  bank  use  various  predomi- 
nating colors  for  their  forms,  the  collection  department 
using  blue.  When  a  credit  to  a  savings  account  is 
made,  the  customer  is  advised  by  using  Figure  103. 
Yellow  is  the  savings  department  color.  The  original 
is  sent  to  the  department  and  the  dupUcate  is  sent  to 
the  customer.  Figm-e  105  is  used  to  credit  a  checking 
account,  the  white  original  ticket  conforming  to  an 
ordinary  deposit  shp. 

When  a  credit  is  made  to  a  coimtry  bank.  Figure 
106  is  employed,  the  duplicate  being  the  advice,  while 
Figure  107  is  used  in  remitting,  the  dupUcate  being 
sent  to  the  exchange  department  which  charges  the 


WHAT  THE  MESSENGER  CAN  DO  257 

collection  department  with  the  amount  and  issues  the 
draft.  From  the  original,  the  stenographer  writes  a 
slip  (Figure  108)  which  is  forwarded  to  the  mailing 
department  and  accompanies  the  draft.  This  slip  has  a 
neater  appearance  than  the  original  and  thus  produces 
a  better  impression  on  the  payee. 

Investigation  indicates  that  bankers  everywhere, 
whether  large  or  small,  lay  particular  stress  on  having 
their  messengers  keep  a  complete  record  of  every  item 
they  take  out.  A  Michigan  bank  has  worked  out  a 
"messenger  sheet,"  which  accomplishes  the  purpose 
easily  and  completely.  This  sheet  (Figure  109)  is 
large  enough  to  cover  the  items  for  a  fair-sized  route. 
In  actual  practice  it  not  only  checks  up  automatically 
on  the  messengers,  but  it  prevents  delays  [in  putting 
through  the  work. 

Before  this  form  was  put  into  use,  collected  items,  a 
great  many  times,  did  not  receive  the  proper  attention 
and  were  either  misplaced  or  held  for  no  particular 
reason.  Now,  at  the  end  of  each  day's  run,  each 
messenger  of  the  bank  has  to  turn  in  this  white  sheet 
listmg  every  collection  which  he  has  taken  out  during 
the  day.  If  for  any  reason  he  has  left  a  draft  with 
customer  for  attention  the  following  day  or  later  on, 
he  has  to  check  it  under  the  column  headed  **out," 
which  shows  what  items  he  has  not  returned  to  the 
bank.  Under  the  column  headed  '4n"  are  the  items, 
paid  or  unpaid  which  he  brings  back  with  him.  In 
this  way  the  collection  manager  has  a  check  on  every 
messenger  and  can  keep  absolute  tab  on  every  item 
which  has  been  taken  out. 

Thus,  this  as  well  as  other  plans  sunplify  the  collec- 
tion routine  and  perfect,  as  far  as  possible,  the 
messenger  service  for  the  good  both  of  the  bank  and  of 
the  business  men  whom  the  collectors  call  upon. 
More  than  that,  each  improved  method  helps  to  speed 
up  collections  and  to  insure  accuracy  in  the  work.    It 


I 


II 


I 


iil 


lil 


258 


MAKING  COLLECTIONS  PAY 


matters  not  whether  the  need  for  better  service  presents 
itself  in  the  prairie  bank  or  in  tne  city  bank,  the 
methods  here  outlined  are  adaptable  either  in  whole 
or  in  part.  And  the  betterment  of  the  messenger 
service  reacts  to  the  benefit  of  the  progress  of  the 
collection  department,  and  of  the  entire  bank  itself. 


CHAPTER  XVIII 


HANDLING  TRADE  ACCEPTANCES 


i 

I.J 


n 


!     ' 


i 


m 


THE  importance  of  encouraging  two-name  trade 
acceptances  is  pointed  out  in  Chapter  VI  of 
the  volimie  of  this  series  on  loans  and  discounts. 
It  is  worth  while  here,  therefore,  to  consider  the 
acceptance  from  the  standpoint  both  of  its  prompt 
collection  and  of  its  status  as  a  credit  risk.  How  can 
it  be  handled  most  advantageously? 

Taking  up  the  credit  problem  first,  the  banker  is 
concerned,  of  course,  with  the  proper  appraisal  of 
trade  acceptances  to  find  out  their  credit  worth.  The 
experience  of  a  number  of  bankers  shows  the  importance 
always  of  examining  and  comparing  the  relative  credit 
standing  of  acceptors  and  the  merit  or  demerit  of  their 
acceptances,  just  as  with  customer  notes. 

*' We  wall  always  have  acceptances  that  will  be  made 
at  a  better  rate  than  some  others,"  says  J.  Frederic 
AngeU,  of  the  American  National  Bank  of  St.  Paul. 
"Some  will  be  taken  at  a  very  low  rate,  while  some  will 
be  refused  altogether.  A  concern  taking  the  accept- 
ances of  its  customers  will  be  using  its  credit  in  the 
same  way  that  it  would  if  it  took  its  note  to  the  bank 
and  got  a  loan.  The  same  questions  will  arise  regarding 
the  concern^s  credit  standing.  Whether  it  discounts 
its  notes  or  its  customers*  acceptances — the  basic 
security,  which  briefly  is  the  ability  to  sell  and  collect 
on  sales,  remains  the  same." 

The  experience  of  bankers  so  far  shows  that  the  proof 
of  the  responsibility  and  capability  of  the  acceptor  of 

259 


1!J| 

'  1 

•IJ 


260 


MAKING  COLLECTIONS  PAY 


nil! 


&  trade  acceptance  is  obtained  for  the  most  part  from 
the  maker,  who  at  the  same  time  becomes  the  indorser 
when  he  presents  the  paper  for  rediscoimt.  The  credit 
manager,  then,  wants  to  be  sure  that  the  information 
regarding  the  acceptor  is  correct,  even  though  the 
financial  standing  of  the  indorser  is  first  class.  The 
temptation,  investigation  indicates,  is  for  the  maker 
to  put  the  acceptor's  best  financial  foot  forward,  when 
he  comes  to  the  bank  with  trade  acceptance  paper. 

''For  this  reason,''  suggests  one  banker,  '* the  data 
thus  obtained  shoiild  be  minutely  scrutinized.  The 
indorser  may  not  always  be  the  best  source  of  informa- 
tion because  unconsciously  at  least  he  may,  as  the 
representative  of  the  selling  house,  be  too  anxious  to 
increase  sales  and  make  as  many  turnovers  as  possible. 
'Second-hand'  information  of  this  sort  might,  if 
distorted  in  any  way,  defeat  the  whole  purpose  of 
trade  acceptances  as  especially  desirable  two-name 
paper  for  the  bank.  Such  data  might  indeed  make  the 
offering  of  security  poorer  ,from  the  standpoint  of 
dependabihty  than  a  commercial  short-time  note. 

"A  better  way  would  be  to  locate  the  acceptance 
with  the  acceptor's  own  bank,  an  alternative  often 
possible,  no  doubt.  This  would  be  fair  and  desirable 
for  every  bank.  In  fact,  it  would  automatically  afford 
each  banker  an  opportunity  to  check  up  at  first  hand 
the  paper  submitted,  even  though  the  trade  acceptance 
in  a  way  would  be  treated  as  single  name  paper  strictly 
from  the  credit  routine  standpoint. 

*' Under  this  arrangement  the  credit  responsibility 
of  the  indorser  is  primarily  dependent  on  his  ability 
to  collect  from  the  acceptor  just  as  in  open  account 
transactions  where  the  credit  standing  of  the  jobber  or 
wholesaler  is  dependent  on  the  class  of  his  accounts. 
Certainly  the  signature  of  a  country  merchant  miles 
away  will  not  of  itself  add  to  the  security  of  the 
instrument,  except  the  merchant  be  known  to  the 


TRADE  ACCEPTANCE  ROUTINE 


261 


I 


seller's  bank.  It  indicates  only  that  the  dealer  is 
conforming  to  the  more  clear-cut  form  of  paying  his 
bills.  Obviously  the  merchant's  own  local  bank  is 
the  best  judge  of  the  credit  risk  involved  in  accepting 
him  as  the  acceptor  of  this  sort  of  paper.  The  bank 
officials  know  the  merchant's  general  standing,  his 
abihty,  and  his  integrity.  They  should  know  the 
merchant's  borrowing  capacity  better  than  the  seller's 
bank  in  a  distributing  center  miles  away.' ' 

THIS  PLAN  OF  USING  TRADE  ACCEPTANCES  IS  NOT  ONLY 
INTERESTING  BUT  PROFITABLE  AS  WELL 

In  practice  this  banker's  plan  works  out  somewhat 
as  follows:  Gaynor  and  Company,  a  jobber,  sells 
goods  to  Edward  Hunt,  a  country  merchant,  and  sends 
him  an  acceptance,  which  he  accepts.  Instead  of 
returning  it  to  the  company,  however,  he  turns  it  in 
to  his  bank  for  discount.  The  bank  charges  the 
acceptance  against  the  local  merchant  and  passes 
through  a  credit  for  the  jobber  to  the  amount  of  the 
invoice.  In  this  way  the  jobber  gets  the  money  for 
the  immediate  needs  of  his  business,  yet  neither  he 
nor  his  bank  have  to  finance  the  buyer.  The  mer- 
chant's bank  finances  the  transaction  and  earns  the 
discount.  He  decides  on  the  worth  of  the  risk  and 
corroborates  the  jobber's  judgment  in  selling  to  the 
merchant.  The  idea  behind  this  plan  is  that  it  relieves 
the  selling  community  of  the  credit  burden  which, 
some  bankers  believe,  should  fall  on  the  finances  of 
the  locaUty  receiving  the  benefits  of  the  goods.  At 
the  same  time  the  smaller  bank  has  the  opportunity 
of  discounting  attractive  paper  and  increasing  its 
profits  materially. 

The  plan,  it  is  argued,  tends  to  lessen  the  amount  of 
necessary  analysis  by  banks  of  acceptor's  responsibility 
— a  difficult  and  important  task  for  the  seller's  bank  if 
the  value  of  the  paper  is  to  be  accurately  estimated. 


"Il 


ti 


I 


Ilh 


262 


MAKING  COLLECTIONS  PAY 


One  of  the  important  reasons  for  encouraging  the 
wisest  use  of  the  trade  acceptance,  as  outlined  in  the 
volume  on  loans  and  discounts,  is  because  it  is  eligible 
for   rediscount   with   the   Federal   Reserve   System. 
Many  banks  have  not  favored  joining  the  Federal 
Reserve  System  because  their  officers  could  see  Uttle 
available  paper  in  their  vaults  to  rediscount.     The 
trade  acceptance  largely  overcomes  this  objection,  for 
It  will  no  doubt  always  be  eligible  for  rediscount. 
Placmg  paper  of  this  sort,  therefore,  among  the  re- 
sources of  a  small  state  bank  would  give  it  the  benefit 
of  the  rediscounting  privilege.    This  alone  might  be 
a  good  reason  for  joining  the  Federal  Reserve  System. 
With  the  development  of  the  trade  acceptance  an 
analysis  of  all  elements  connected  with  its  use  will 
help  the  banker,  whether  large  or  small,  to  decide 
what  procedure  to  take. 

As  proof  of  how  the  trade  acceptance  is  growing  in 
favor,  take  the  one  instance  of  a  southern  wholesaler 
who  discounted  trade  acceptances  amounting  to  more 
than  $1,150,000  during  one  year  and  of  this  sum  lost 
only  $140,  due  to  the  failure  of  a  small  manufacturer. 
In  precisely  the  same  way  other  busmess  men  have 
taken  advantage  of  the  plan. 

This,  of  course,  imposes  not  only  new  credit  tasks 
on  bankers,  but  new  routine  work  as  well.  And  this 
brings  us  to  the  problem  of  recording  and  collecting 
trade  acceptances.  If  a  banker  discounts  acceptances 
he  will  want  to  back  up  his  credit  department  with 
concise  and  adequate  records.  Some  banks  find  it 
sunpUfies  the  routine  to  purchase  acceptances,  instead 
of  discounting  them,  and  figure  the  running  interest, 
making  a  suitable  charge  for  this  service,  together 
with  exchange  charges  each  month.  At  the  suggestion 
of  the  American  Trade  Acceptance  CouncU,  some 
banks  have  worked  out  a  simple  way  to  take  care  of 
acceptances  to  good  advantage.    The  bank  gives  each 


I' 


NiyE 

^ 

ADDRESS                                                                                                           * 

Dato  of 
Purchase 

Name  of 

Maker 

or  Acceptor 

Place  of 
Payment 

Amount 
of 

Principal 

Amount 

of 
Interest 

Total 
Amount 

Date  of 
Maturity 

1    1 

1     i 

^                                                                                                                            Arriftimt    MiimhAr                                1 

1 

Handled  as 

Collection 

Number 

Disposition 

Exchange 
Cost 

Remarks 

Balance  or  Total  Amount 
of  Acceptances  Outstanding 

i 

Returned 
Unpaid 

Paid 

Date 

Amount 

• 

0 

Figure  110:  Here»  shown  in  two  sections,  is  the  trade  acceptance 
liability  ledger  in  use  by  one  bank.  As  soon  as  a  customer  presents 
any  paper  of  this  type  for  discount,  one  of  the  forms  is  filled  out* 


MERCHANTS  NATIONAL  BANK  Richmond.  Virginia 

Please  refer  to 
our  numlMf 
j^                                                                                                    No.  7535 

We  enclose  herewith  for  collection  the  Hem  stated  below 

NO  PROTEST 

Date  sent 

Payer 

* 

Amount 

Due 

Indorser 

Date  or 
Number 

Advise  payment  by  our  number. 
Do  not  hold  drafts  for  convenience  of 
payer. 

Figure  111:  This  form,  made  out  in  triplicate  to  furnish  adequate  rec- 
ords for  the  bank's  needs,  satisfactorily  takes  care  of  each  trade 
acceptance  which  may  be  sent  out  to  any  other  bank  for  collection. 

263 


264 


MAKING  COLLECTIONS  PAY 


IF  i] 


Hii 


mi 


customer  selling  any  quantity  of  these  acceptances,  a 
number.  When  the  customer  offers  trade  acceptances 
for  sale  or  discount,  the  total  amount  of  the  acceptances 
is  entered  on  the  offering  book,  and  his  account  on  the 
books  of  the  bank  is  credited  with  that  amount.  The 
customer's  number  is  then  placed  on  the  reverse  side 
of  the  acceptances  as  follows:  T.  A.  No.  1.  An  account 
is  then  opened  in  the  liability  ledger  (Figiu-e  110). 

Trade  acceptances  purchased  at  any  time  from  this 
customer  are  entered  in  the  space  provided  in  the 
liabiUty  ledger  which  is  arranged  to  include  all  necessary 
data.  Having  been  so  hsted,  these  acceptances  are 
delivered  to  the  collection  department  which  forwards 
them  to  the  various  places  of  payment  for  collection. 
As  each  one  is  paid  or  returned,  the  collection  depart- 
ment advises  the  discount  department.  Paid  items 
are  credited  to  the  trade  acceptance  account,  and 
those  returned  unpaid  are  charged  against  the  seller's 
account  in  the  general  ledger  and  in  the  hability  book 
kept  in  the  discount  department. 

By  this  method  it  is  easy  to  see  how  the  balances 
outstanding  change  from  day  to  day.  At  the  end  of 
the  month,  interest  on  the  daily  outstanding  amount 
of  trade  acceptances  purchased  is  charged  against 
the  account  of  the  seller,  together  with  all  exchange 
charges  incidental  to  the  collection  of  these  items. 

It  is  considered  important  to  give  each  accoimt  a 
number  so  that  the  collection  department  can  keep 
track  of  the  items  in  numerical  order.  This  makes  the 
routine  more  simple.  It  advises  the  discount  depart- 
ment by  number  of  all  the  acceptances  paid  or  returned. 
The  methods  of  collection  follow  definite  principles. 
To  make  the  work  uniform  all  items  are  entered  on  a 
special  form  (Figure  111)  made  out  in  tripUcate.  The 
original  goes  out  with  the  collection,  the  duplicate  goes 
to  the  discount  department  for  its  information,  and  the 
third  copy  remains  in  the  collection  files  for  reference. 


1 

OEBlt 

NO  PROTEST 

Number  7535 
ENDORSER 

Date  sent 

ftyar 

Amotnit 

Du0 

Figure  112:  How  well  the  routine  of  handling  the  trade  acceptance 
is  followed  out,  is  evidenced  by  this  form,  which  serves  as  a  debit 
to  record  trade  acceptances  sent  to  correspondents  for  collection. 


The  item  described  below  has  been  received  from  the 
MERCHANTS'  NATIONAL  BANK  of  Richmond.  Va. 

By 

and  entered  for  collection,  their  instructions  noted 

No  Protest 

Date  sent 

Payer 

Amount 

Due 

/■ 

Please  sign  and  return  by  first  mail 

Figure  113:  For  an  additional  follow-up  record  on  all  acceptance 
items  sent  out  for  collection,  this  bank  provides  the  notice  shown 
above  for  return  from  the  correspondent  bank  receiving  the  collection. 

265 


266 


MAKING  COLLECTIONS  PAY 


The  second  copy  also  serves  as  a  receipt  to  the  discount 
department  for  the  acceptances  sent  out. 

Figure  112  is  the  debit  ticket  which  the  collection 
department  makes  out  for  a  charge  against  the  corre- 
spondent to  whom  the  items  are  sent  for  collection. 
As  a  further  safeguard,  the  bank  which  receives  the 
items  is  asked  to  send  back  a  receipt  for  the  accep- 
tances as  illustrated  in  Figure  113. 

These  forms,  of  course,  are  flexible  in  their  make-up 
and  can  be  changed  to  meet  individual  needs.  In 
fact,  they  can  easily  be  arranged  in  sets  so  that  by 
the  use  of  carbons  the  information  can  be  entered  on 
several  of  the  records  at  once.  But  the  principles  are 
the  same  in  any  case  and  show  how  the  paper  can  be 
safeguarded  and  handled  most  effectively. 

The  form  of  liability  ledger  shown  in  Figure  110 
could  be  used  even  though  a  bank  desired  to  discount 
each  individual  acceptance.  There  is  danger,  however, 
that  should  banks  insist  upon  discounting  this  paper, 
it  would  be  a  very  tedious  task  for  the  discount  depart- 
ment, and  nothing  would  be  saved  by  this  method. 
In  Canada,  for  instance,  bankers  make  a  practice  of 
discounting  these  acceptances.  In  the  United  States, 
with  the  tremendous  amount  of  business  done,  it  is 
likely  that  paper  of  this  sort,  if  discounted,  would  not 
become  popular  in  banks  on  account  of  the  large 
amount  of  extra  detail  work  necessary,  while,  if  the 
interest  is  figured  on  running  time,  or  on  the  same 
basis  as  call  loan  interest  is  figured,  the  reverse  would 
be  true.  In  fact,  trade  acceptances,  handled  on  a 
practical  basis,  are  becoming  more  widely  popular. 

To  facilitate  the  work,  some  banks  might  find  it 
advisable  to  make  up  the  liability  ledger  in  triplicate, 
in  order  that  the  sellers  could  secure  the  total  monthly 
statement  of  their  transactions  with  the  bank  during 
the  month.  Of  course,  it  is  entirely  possible  to  have 
other  forms  which  would  give   the  bank  the  total 


TRADE  ACCEPTANCE  ROUTINE 


267 


acceptances  handled  for  each  acceptor,  and  so  on. 
But  this,  perhaps,  is  not  altogether  necessary,  as  the 
bank  is  more  vitally  interested  in  the  amount  of  trade 
acceptances  piirchased  from  each  customer. 

It  is  worth  while  adding  that  if  a  customer  is  dis- 
counting his  own  paper  at  the  same  time  that  he  is 
selling  trade  acceptances,  the  total  amount  of  trade 
acceptances  outstanding  at  any  time  should  be  posted 
to  his  account  in  the  HabiUty  ledger,  showing  the 
amount  for  which  he  is  liable  at  all  times,  both  con- 
tingent and  direct. 

This,  then,  shows  in  a  concise  way,  a  simple  method 
for  handUng  trade  acceptances  worked  out  by  a  com- 
mittee of  bankers  and  adopted  partially  or  fully  by 
some  banks.  Any  modification  or  extension  of  the 
plan  can  be  made  to  suit  the  needs  of  each  bank. 

Indirectly,  at  least,  the  method  of  disposing  of  trade 
acceptances  has  to  do  with  the  success  of  the  credit 
department  in  handling  all  such  paper  satisfactorily. 
And  by  using  good  judgment  with  the  aid  of  properly 
kept  records,  the  credit  manager  can  safeguard  the 
interests  of  his  bank  and  help  the  collection  depart- 
ment to  bring  payments  in  promptly.  At  the  same 
time  he  encourages  among  the  bank's  customers 
greater  care  in  selling  goods  and  helps  to  raise  the 
acceptors'  standards  of  doing  business.  Broadly  con- 
sidered, isn't  this  cooperating  in  the  general  task  of 
making  all  credits  safe,  which  in  the  final  analysis 
means  safer  and  more  profitable  banking? 


I 


IRREGULAR  PAGINATION 


INDEX 


I- 


ACCEPTANCES.  TRADE  (Sm 
Trade  Acceptances) 

Account,  income,  what  it  bHowb  115 

Accounts  receivable,  when  they  are 
Quick  assets  02 

Accuracy,  iteed  of,  in  credit  depart- 
ment 23,24 

Agencies,  credit,  using  69 

ASSETS 
— accounts  receivable  92 

checked  by  audits.  148,  151. 

154.  155 


— cash 
— investments 
— merchandise 
— notes  receivable 
—Quick 
— slow 

— what  constitute 
AUDITS 
— how  they  help 


83 

04 

03 

02 

78.  79,  87.  88.  92 

79.  92.  95 

78,  87,  88 


the   borrower, 
144.  145,  146.  147 
151,  154,  155 
159 


148. 


— to  check  as-vts 

— to  check  bonded  debt 

—to  check  inventory  149 

— to  check  investments  150 

— to  check  notes  payable  157 

—to  check  reserves  158 

— to  show  depreciation  147.  148 

—value  of  outside  143.  160,  162 

—what  they  oan  show,  147.  148. 

—when  they  should  be  required, 

144,  145,  146,  147 

B 

BALANCE  SHEET 
—general,  what  it  shows,  115, 118, 

. .  1 19.  120,  121,  122,  123.  124 
—how  to  judge  the  value  of  items 

.on      _,  82, 83 

—how  used  g2 

BUSINESS  CX)NDITIONS 

—a  plan  to  leam  162.  164 

— «s  shown  by  commercial  paper 

market  107 

— bearing   on  loans  166 

— keeping  in  touch  with  163.  170 

—watching  the  markets  165 

—watching  the  papers  165 


Capacity,  how  it  affects  borrowing. 
Capital,  how  it  affects  borrowing.* 


CASH 

— ^in  bank  gg 

— on  hand  gg 

Character,  as  a  basis  for  borrow- 
ing 86,  101,  102.  103.  106.  107 

V/liecks,   watchini?.   as  a  source  of 
credit  information  74 

Classification  of  risks,  records  for,  40. 

44.  49,  54,  59.  61,  64 

CLEARING  HOUSE,  COUNTRY 
—for  country  items  2OI 

— how  expenses  are  met  203 

— how    to    operate    for    country 

Items  202,  204,  205.  211,  214 

— ^how   to   organize   for   country 

Items  202 

—routine  for  204.  205.  208 

— savings  made  by  21O 

Codes,  for  credit  department  records    38 

COLLECTIONS 
— a   card   record   that   simplifies 

routine  223 

— a   system   for   handling    at    a 

..Pfofi^      ,  ,        215.216.219 

— ehmmating  losses  from  215.  216 

— forma  that  expedite,  226,  228. 

231.  234,  235.  236.  237.  256,  257 
—letters  that  help  228,  253 

— routine  for  handling.  216.  218. 
220.  222.  226,  231.  234,  235 

236,  244,  246,  247,  249,  252 
COMMERCIAL  PAPER 

—files  for  192 

— getting  agency  reports  on  70 

COMMITTEE 
—discount 

—duties  of  fg 

—membership  of  S9 

— meetings  of  29 

Comparative  statements,  how  they 

show  up  conditions  68,  69 

CONDITIONS,  BUSINESS 
— a  plan  to  learn  162,  164 

—as  shown  by  commercial  paner 

market  167,  168 

— ^bearing  on  loans  I66 

— keeping  in  tou'^h  with  162,  170 

— watching  the  markets  165 

— watching  the  papers  165 

Contingent  liabilities,  danger  of  121,  122 
Country  bank,  a  filing  system  for  190, 191 
CREDIT 
—foMer  10.11.14 

— mformation,  gathering  6,    6 

— knowing  a  man's  i 

— letters  (^ 

— records  3,  g,  9 

—reports  for  the  discount  com- 
mittee 10 


XXI 


;j 


Is  ,< 

IM.-' 


INDEX 


CREDIT  AGENCIES 
—daily  reports  from 
■—value  of 

CREDIT  DEPARTMENT 
—cutting  routine  of 
—files  for 
—organization  of 
■signals  in  filing 

CREDIT  MAN 

^limiting  authority  of 
—what  qualities  he  should  have 


72 
69.70 

30 

184 

6.24 

185 

29 
4 


Debt,  bonded,  as  checked  by  an 
audit  159 

Depreciation,  as  shown  by  an  out- 
side audit  U7.  148 

DISCOUNT  COMMITTEE 

— duties  of  20 

— meetings  of  29 

^membersliip  of  29 


EMPLOYEES 
— getting  credit  information  from      31 
—need  of  accurate,  in  credit  de- 
partment 23,  24 

Equipment,  filing  196.  197,  198 

EXCHANGE 
^-oi  credit  information,   policies 
of,  174,  177,  178.   179.   180. 

181.  182,  183 
— of  credit  information,  ways  for  171 
— ^ates.    reducing    with    clearing 

house  202 


FARMERS 

— aa  commercial  borrowers.   128. 

127,  132.  133,  134.  140 
— getting  contact  with.  131,  136. 

138.  139 
—loans  to  125,  126 

— sizing  up  the  135,  136,  137.  138 

— statements  required  from      127,  130 

FILES 
—a  system  of,  for  country  bank, 

190,  191.  192 
—for  correspondent  banks  190 

—for  credit  department  184 

—for  watching  commercial  paper  192 
— keeping  track  of  folders  188 

—kinds  used  196.  197,  198 

—need  of.  in  country  bank  190 

—personal,  to  olassiiy  risks  40.  44 

— signals  that  simplify  185 

Folders,  for  credit  information,  10, 

11.  14,30 

FonnSi  for  country  clearing  house. 

204.  205.  208 


GENERAL  BALANCE  SHEET 
— what  it  is  115 

— wbftt  it  shows.  118,  119.  120, 

121.  122.  123.  124 


H 


Honesty,  importance  of,  in  granting 
credits  IM 


I 


Income  account,  what  it  shows 
INFORMATION 

— checking  up  on  casual 

— gathering  credit 


115 

38.39 
6,  6.  37 
74 
31 


—getting  credit,  from  checks 
— getting  credit,  from  employees 

INFORMATION.  CREDIT 
— charging  fees  for  175 

— forma  which  give  174 

— getting  with  personal  letters         172 
— needs  of  exchani^ing  171 

— T)lan3  for  exchanging  171 

— policy  of  exchanging.  174.  177, 

178,  179.  180.  181,  182,  183 
— routine  for  172.  175 

Insurance,  as  an  asset 

Introduction  cards,   for   bank   em- 
ployees 

Inventory,     checked     by     outside 
audits 

INVESTIGATORS 
— using  to  dig  out  credit  facts 


160 
103 
149 


— what  one  found  out 

INVESTMENTS 
— checked  by  audits 
-value  of.  on  the  statement 


65 
65.  66.  67 

150 

94 


LETTERS 
— asking  for  credit  information, 

,      J..  ^2. 73 

— of  credit  64 

— that  bring  in  statements     IS.  19.  22 
LIABILITIES 
— contingent,  danger  of  121,  122 

— deposits  of  money  08 

— notes  payable 

— for  merchandise  95 

—for  paper  sold  98 

—to  own  banks  95 

—reserves  98 

Liability,  ledger  sheet  8.   6 

LOANS 

— a  system  of  classification  for  27 

—commercial,    to    farmers.     126, 

127,  130,  132,  133.  134.  135 
— idso  of.  to  farmers         135.  136,  140 


M 


Merchandise  as  shown  on  the  state- 

ment  03, 04 

MESSENGERS 
— necessity  of  using  good  judg- 
ment 240 
-routine  for.  243,  244,  246,  247, 

249.  252.  257 
— routing  of  trips  238,  239 

— aonesfor  239 


' 


INDEX 


New  customers,  getting  a  line  on  the 
^  moral  risk  of  102 

Note    brokers,     buying    commercial 
paper  from 

NOTES  PAYABLE 

— for  paper  sold 

— how  they  affect  borrowing  capa- 
city 

— to  own  banks 
Notes  receivable,  what  kind  of  assets 

they  are 


les 

98 

95 
95 


92 


Operating  statement,  how  used       83,  84 


Paper,  commercial,  getting  agency 

reports  on  70 

Personal  element  in  loans  to  farmers 

135.  136.  137,  13S 
Personal  risk,  sizing  up  the  lOU 


Ratios  that  afiTect  borrowing  87 

RECORDS 
— auxiliary,  for  credit  denartment     17 
— codes  for  credit  department  38 

— condensed,  for  the  lending  office 

...  J.  „      14.  15,  10 

— for  gmng  credit  3,  5.  6.  12,  13 

— need  of  accurate,  as  a  basis  for 

loans  31 

—of  maturing  notes  16 

— that  check  up  when  statements 

are  duo  21 

—that  classify  the  risks  40,  44,  4  J 

^,    ,    ^  54,  59.  61,  (i4 

— that  show  a  customer's  relations 

with  the  bank  8,  9.  10,  11 


— that  show  all  credit  information 

28.32 
— that  show  legal  status  of  bor- 
rowers* officers  26.  28 
Reserves,  effect  on  borrowing  ability    98 
RISK.  PERSONAL 
— effect  on  loans  100 
— sizing  up  the  new  customer 

ROUTINE  '"'•  ■"=*•  "^-  »■" 

— cutting,  with  credit  department     30 
— for  exchanging  credit  informa- 

tion  172,  173 

— ^for  filing  department  184.  185 

— for  hanrlling  inquiries  188.  189 

— for  keeping  track  of  credit  folders  188 
— that  saves  officers'  time  33 

s 

STATEMENTS 

—analyzing        113.  114.  115,  116,  118 
119,  120.  121.  122,  123,  124 
— gcttmg  customers  to  give  them      35 
— how  to  group  items  of  77,  78 

— of  income  115 

— operating  83,  84 

— required  from  farmers    127.  130,  132 
— supplemental  1 14 

— that  do  not  show  condition  of  the 

business  113,  114 

— value  of  comparative  68.  69 

— what  complete  should  show  110.  Ill 


Tests  for  a  safe  loan  86,  87 

TRADE  ACCEPTANCES 
— appraising  the  credit  worth  of 

„      .  259.  260,  261 

— collectmg  routine  265 

— routine  for  handling  262,  264 


XXll 


XZIU 


'It 


I 


Date  Due 


A) 


n 


^ 


^ 


. '/^^%l^/l^'^^ 


X>'2^s7. 


c 


Credits  and  collections 


COLUMBIA  UN.VWSrTYLJBRJ^^^^ 


S041 425464 


^iiX 


41^3^ 


END  OF 
TITLE 


